The road from quarterly surplus to deficit - are we in trouble?

The road from quarterly surplus to deficit - are we in trouble?

New Zealand just booked the largest quarterly trade surplus in its history. Hooray! But annually we’re still recoridng a deficit – as per usual. Why? And will someone one day come to shut us down? Idealog publisher Vincent Heeringa investigates in the first of a regular series.

How does 1.4 billion sound to you? A lot? Well it is, when it’s our quarterly surplus – the largest ever in recorded history. Apparently such surpluses are rare. Brian Fallow says it’s just the sixth in the last 10 years.

It reflects all sorts of good things happening: increased meat exports, increased spending by foreign visitors (that’s tourists) and very high dairy exports. What makes it especially noteworthy is that the dollar remains at record highs. It supports the view promoted by the world’s cheeriest economist Paul Bloxham that New Zealand is a rock star economy.

But there’s something I don’t get in all this. The fact that this is a rare event suggests the normal state of affairs is a trade deficit. Sure enough, the report goes on to predict the annual balance of payments will indeed be a $6.3 billion deficit, the equivalent to 2.8 per cent of GDP.

Now, that is the lowest for three years and much lower than the eight percent we booked back in 2008. But here’s rub. New Zealand has been running a trade deficit for decades. It’s the norm. The last time we ran an annual surplus was in 1973 – and that too was rare.

It means that we are a net-cost to the world economy, supported by overseas investors, in particular banks that effectively loan us the money to keep the lights on. Gross debt, private and public, sits at about 110 per cent of GDP. This seems bad to me but two economists talked me down.

“Firstly, we’re not alone,” says ASB’s Nick Tuffley. “Australia, US, UK all run trade deficits. Japan, after many years of running a surplus, is switching to a deficit. European economies are a mixture.”

Great we’re all going to hell in a handbasket together, then. “No. The second thing to note is that our deficit is offset by our growth. So long as our GDP growth outstrips the growth in our deficit then we’re in a sustainable position.”

With headline GDP growth at about five percent and the deficit under four percent, we’re doing okay, he says. Third, it’s not at all clear who’s funding those deficits.

We assume that it’s overseas banks and investors. But a good chunk of that deficit is ‘returned’ to New Zealand by foreign companies operating here.

“So a foreign-owned company may record that it made a profit and all of that profit is in included in the deficit. But only the dividend is shifted offshore. The rest remains as retained earnings.”

Matthew Nolan of Infometrics agrees with all that and says a fourth factor to bear in mind is relativities. When debt is 110 per cent it sounds scary. “But to put it in perspective, when Ireland collapsed, gross debt was 1000 per cent of GDP.”

In other words, I need to choose something else to worry about.