27 Aug 2015

Tough road to overcome trade deficit

12:06 pm on 27 August 2015

The annual trade deficit has narrowed slightly, as a sharp lift in exports more than offset higher import costs.

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New Zealand's exports grew by 14 percent in July, but still lagged behind imports Photo: 123rf.com

Official figures show the shortfall stood at $2.7 billion in the 12 months to July, compared with $2.85 billion in the June year.

An economist at Infometrics, Benje Patterson, said exports grew by 14 percent to $4.2 billion in July, due to higher sales of fruit and meat, while the lower dollar has benefited manufacturers of medical, mechanical and electrical machinery goods.

But Mr Patterson said cooling growth in China could make it difficult for manufacturers in their key market, Australia, despite a more favourable currency and lower raw material costs.

"They're (manufacturers) doing okay at the moment, but that doesn't mean they are out of the woods yet."

Imports rose by 5 percent to $4.8 billion, led by clothing and mobile phones

Some economists have seen this as an indication that domestic demand has held up.

But Mr Patterson was not so sure.

"Often what we see when there's a fall in the currency is that the value of imports initially spike. People have become accustomed to their spending patterns .. so they consume similar amounts. Over time consumers adjust to higher prices and reduce their demand."

Mr Patterson said vehicle demand was already starting to wane.

He expected the deficit to widen in the coming months, before stabilising next year due to weaker import demand and stronger exports outside of the dairy sector.