Bank sounds the alarm over NZ’s ‘staggering’ trade deficit

“Decreasing imports is hard. No-one wants to be told to consume less, and no-one wants to be told you can’t have a new car this year, for example.”

Andre Castaing, ANZ economist

New Zealanders’ standard of living will fall and the country may be faced with a nasty recession if it doesn’t get on top of its huge trade deficit “reasonably fast”, the country’s largest bank has warned.

ANZ economist Andre Castaing said the value of the New Zealand dollar could fall to half that of the United States dollar if the country failed to proactively address the trade imbalance, pushing up the price of “everything from cars and computers to rice”.

“Running up debt can only ever be a short-term fix. We tried it in 1972 when the UK joined the European Community, overnight excluding much of our exports from their markets,” he said.

“New Zealand became instantly poorer but spent the next couple of decades trying to pretend it wasn’t, which didn't go well. The bottom line is, ‘something’s gotta give’.”

Concerns over the country’s trade deficit, which was last measured at 3.5% of GDP, have been steadily building over the past two years. Castaing described it as “staggeringly wide by historical standards”.

The annual balance of payments deficit, which also takes into account the two-way international flows of dividends and interest payments on debt, declined to $29.8 billion in the year to the end of June, down from the record of $33.4b set in the year to the end of December.

That was in part due to a partial recovery in inbound tourism following the lifting of Covid travel restrictions.

But Castaing said ANZ had chosen to more fully articulate its concerns over how difficult it might prove to properly close the gap because the bank wanted to make it clear that the drivers of the deficit were not just part of a temporary post-Covid phenomenon.

Short-term risks included a reduction in airline fleets delaying the tourism recovery, and the El Nino weather event affecting agriculture.

But Castaing also drew attention to more existential threats, such as “de-globalisation”, a shift towards the consumption of synthetic meat and dairy, and low population growth in China.

Ahead of the election, Green Party transport spokesperson Julie Anne Genter emphasised the trade as well as environmental benefits of reducing imports of petrol and petrol-fuelled cars.

“One simple thing we could do to close our current account deficit straight away is reduce our imports of private vehicles and fossil fuels,” she said.

“Those combined are worth more than our dairy exports.”

However, Castaing said ANZ saw the bigger part of the solution to the trade imbalance revolving around growing exports, rather than reducing imports.

“Decreasing imports is hard. No-one wants to be told to consume less, and no-one wants to be told you can’t have a new car this year, for example.”

National has promised in its 100-point economic plan to “work relentlessly” to remove barriers to trade and open new export markets, including by prioritising the country’s trade relationship with India, with the ultimate goal of developing a free trade agreement.

It also suggested that its commitment to partially repeal a ban on foreigners buying residential property, by allowing them to buy homes worth more than $2 million, could assist.

Castaing agreed in ANZ’s report that India was the “obvious candidate” for trade diversification.

“But the big issue there is lack of a reliable cool chain and current protectionist trade policies,” he said. “Trade will grow, but probably not as fast as we’d prefer.”