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MAY 12

Traded sector the fix for financial outflows

Last month’s newsletter looked at New Zealand’s current account deficit and its implications. This month I would like to have a closer look at how the current account is structured.


The graph shows that the negative financial flows are not offset by the trade flows. The trade balance has hovered around zero over the long-term while financial outflows far exceed financial inflows. We are starting to see the same trends that existed from 2003 to 2008 redevelop and it is expected to worsen over the next few years.

These financial outflows are hard to address in the short to medium term as they stem from things like repatriated profits from foreign owned companies based in New Zealand and interest income from investments here. Over a longer term increased savings would require less investment from overseas, but this would take some time.

Essentially to get the current account back into surplus we need to start generating a large and consistent trade surplus. Better returns to exporters would lead to more investment in the external sector, and more investment will lead to higher activity: better returns require the exchange rate issue to be addressed.

Unfortunately we saw a rather unfortunate comment from John Key last month describing concern over the currency as ‘la la land stuff’. The comment was superficial and ignored the simple fact that the United States, the United Kingdom, Switzerland, Brazil, China and Singapore, to name a few, are all engaged in currency management – it seems ‘la la land’ occupies a substantial part of the planet.

If we want to grow New Zealand’s external sector we cannot afford to take a risk adverse attitude to economic policy and we cannot ignore the competitive element – that is if another country works to lower their exchange rate it puts our own traded sector at a disadvantage if we don’t respond.

To put the impact of our economic policies in perspective Switzerland had a current account surplus of $80 billion last year.

tags: current account, exchange rate, trade, financial flows
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