The visible hand in economics

June 2008 current account deficit: Cause for concern?

Posted on: September 22, 2008

On Friday, Statistics NZ told us that the current account deficit had spiked to 8.3% of GDP in June, from 8.0% in March.

When I was watching Agenda, some of the commentators appeared to view this increase as a bad thing. Now I have said before that a current account deficit is not a bad thing – but there did appear to be some genuine concern on the show. Fundamentally, people were worried as the economy was slowing, which normally means imports are slowing, which should narrow our current account deficit – but it didn’t happen.

There are two reasons why the deficit didn’t narrow:

  1. One off capital expenditure for the Tui oil field (combined with continued strong plant and machinery imports),
  2. High oil prices.

The first factor doesn’t matter (actually it is interesting to note that since it turned up in the BOP it implies that we purchased the oil machinery – rather than hiring it, I think šŸ˜› ) as we expect this capital expenditure to create value in the future.

The second factor can be seen as a concern, but not because of the widening current account deficit – the concern should stem from the fact that higher oil prices lower our national income, as we are an oil importer. Fundamentally, if the increase in petrol prices is temporary, we would expect the current account deficit to rise – as people will just borrow now to make up for the temporary reduction in income. If the increase was permanent, any increase in the current account would be muted.

As a result, if we believe that oil prices are going to head back to $150US a barrel and stay there – then the sharp increase in the current account is concerning, as it appears to suggest that consumers think that the lift from $100US to $150US was temporary. If this belief is right and consumers are wrong, then they are borrowing off future income they won’t get – which is bad.

Of course, the price of oil has fallen to around $100US a barrel.

Update: And of course, the day after I write this the price of oil bounces back to $126US!

5 Responses to "June 2008 current account deficit: Cause for concern?"

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[…] reverse side of the current account deficits that we like to discuss on this blog (most recently here). For some reason a capital account surplus is often seen as a good thing by journalists while a […]

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