.....so why aren’t the politicians talking about it?
As New Zealand confronts a near-record current account deficit few, if any, of the country’s politicians are talking about it or the underlying problems.
NZ’s external deficit is expected to continue narrowing, but at a slower pace than forecast a few months ago.
Data out this week is expected to show the value of the current account deficit was equivalent to about 8% of GDP in the year to June.
NZ is living beyond its means but the politicians appear to be ignoring the issue, and its implications.
It’s almost as if they think the Reserve Bank only needs to wheel out the money machine and print bundles of cash, as it did during the Covid pandemic, for the problem to be solved.
While some commentators, such as Simon Wilson in the NZ Herald, praise the government for its economic policy during the pandemic, the current account deficit for years ended March has burgeoned from $8.5 billion in 2018 (3 per cent of GDP) to $33 billion (8.5 per cent of GDP) in 2023.
During the Covid outbreak, the main prop sustaining NZ’s export receipts was the country’s agricultural sector, and there was a significant expansion of trade to China.
But now the Chinese economy, hard hit by Covid, it seems has lost much of its appetite for NZ’s food exports.
Treasury pointed to slowing growth in China, which is suppressing commodity prices to the detriment of NZ exporters.
“Between the beginning of May and mid-August, the benchmark US dollar dairy auction price declined 17 per cent to its lowest level since 2016,” the Treasury said.
“Ample milk supply and high inventories in China have also contributed to the lower price. Prices for NZ’s meat and forestry exports have also declined.”
That’s not the only issue hitting NZ’s external income. The country’s tourist trade has shrunk without Chinese visitors and Chinese students.
ANZ economists are also wary of the risks posed by China.
“In big-picture terms, the current account deficit is still far too wide, making NZ vulnerable to a sovereign credit rating downgrade and suggesting there is a material risk that the transition away from this out-of-balance position involves higher-for-longer retail interest rates (as NZ picks up a wider risk premium) and a weaker New Zealand dollar,” they said in a report.
A weaker dollar would result in NZ paying more for its imports, potentially exacerbating inflation and therefore putting upward pressure on interest rates.
So while the government’s fan base in the media is singing its praises and brushing aside the painful aspects of the economy, whichever party or coalition of parties becomes the next government will have to battle hard to rebalance the economy.
They will know the credit rating agencies are watching closely how NZ’s economy is performing.
S&P last week said in a report that the large current account deficit remained NZ’s “key credit risk”.
It warned it could lower NZ’s credit rating if the current account was “persistently weak”.
Meanwhile NZ’s businesses are finding trading more difficult, as well as coping with higher interest rates.
Then there are New Zealanders flooding across the Tasman in search of better pay.
There might even have been a shortage of labour, had not NZ attracted thousands of migrants searching for a better life than in their Covid-racked homelands.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
NZ is living beyond its means but the politicians appear to be ignoring the issue, and its implications.
It’s almost as if they think the Reserve Bank only needs to wheel out the money machine and print bundles of cash, as it did during the Covid pandemic, for the problem to be solved.
While some commentators, such as Simon Wilson in the NZ Herald, praise the government for its economic policy during the pandemic, the current account deficit for years ended March has burgeoned from $8.5 billion in 2018 (3 per cent of GDP) to $33 billion (8.5 per cent of GDP) in 2023.
During the Covid outbreak, the main prop sustaining NZ’s export receipts was the country’s agricultural sector, and there was a significant expansion of trade to China.
But now the Chinese economy, hard hit by Covid, it seems has lost much of its appetite for NZ’s food exports.
Treasury pointed to slowing growth in China, which is suppressing commodity prices to the detriment of NZ exporters.
“Between the beginning of May and mid-August, the benchmark US dollar dairy auction price declined 17 per cent to its lowest level since 2016,” the Treasury said.
“Ample milk supply and high inventories in China have also contributed to the lower price. Prices for NZ’s meat and forestry exports have also declined.”
That’s not the only issue hitting NZ’s external income. The country’s tourist trade has shrunk without Chinese visitors and Chinese students.
ANZ economists are also wary of the risks posed by China.
“In big-picture terms, the current account deficit is still far too wide, making NZ vulnerable to a sovereign credit rating downgrade and suggesting there is a material risk that the transition away from this out-of-balance position involves higher-for-longer retail interest rates (as NZ picks up a wider risk premium) and a weaker New Zealand dollar,” they said in a report.
A weaker dollar would result in NZ paying more for its imports, potentially exacerbating inflation and therefore putting upward pressure on interest rates.
So while the government’s fan base in the media is singing its praises and brushing aside the painful aspects of the economy, whichever party or coalition of parties becomes the next government will have to battle hard to rebalance the economy.
They will know the credit rating agencies are watching closely how NZ’s economy is performing.
S&P last week said in a report that the large current account deficit remained NZ’s “key credit risk”.
It warned it could lower NZ’s credit rating if the current account was “persistently weak”.
Meanwhile NZ’s businesses are finding trading more difficult, as well as coping with higher interest rates.
Then there are New Zealanders flooding across the Tasman in search of better pay.
There might even have been a shortage of labour, had not NZ attracted thousands of migrants searching for a better life than in their Covid-racked homelands.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton
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