23 Sep 2009

Deficit turnaround predicted to be shortlived

7:02 am on 23 September 2009

There are doubts a big turnaround in New Zealand's financial and trade dealings with the rest of the world in the most recent quarter will last.

The current account deficit in the three months to June was $612 million - a sharp improvement on the previous deficit of $2.1 billion.

In the year to June, the deficit narrowed to $10.6 billion, or 5.9% of Gross Domestic Product - it's lowest level in nearly five years.

The turnaround in the June quarter was driven by a fall in profits paid to foreigners on their local investments.

Lower profits at the Australian-owned banks were of particular significance. This follows a fall in the deficit in the March quarter driven by lower imports.

But economists say the deficit will widen again as the economy recovers and imports and company profits improve.

In July, credit ratings agency Fitch warned of a downgrade, partly because of the high current account deficit.

But Finance Minister Bill English says the deficit will only be permanently fixed through higher exports.

ANZ chief economist Cameron Bagrie predicts the deficit will start widening again next year as the economy recovers, bolstering demand for imports, improved corporate profits and higher interest rates.