26 Jul 2012

Trade deficit outlook likely to remain bleak - economist

7:39 am on 26 July 2012

An economist expects the outlook for the country's trade deficit to remain bleak as uncertainty in Europe feeds into New Zealand's main trading partners' markets.

The country's exports fell for a second consecutive quarter.

Statistics New Zealand figures show a seasonally adjusted trade deficit of $664 million for the June quarter, an improvement to the $708 million deficit for the March quarter.

And on an annual basis, the trade balance recorded a deficit of $747 million, or 1.6% of exports.

ANZ senior economist Mark Smith says the high kiwi dollar will lead to a larger trade deficit in the short-term.

He says weakness in Europe will feed through to New Zealand.

Mr Smith says there will be a direct impact because Europe takes about 10% of New Zealand's merchandise exports.

"Probably more important will be the impact on the world economy as a whole, China for example, its largest export market is Europe, so weakness in Europe is likely to transmit through to a weaker outlook for our trading partners and this will be a key head wind for exports going forward".

Mr Smith says the high New Zealand dollar is dampening export returns and low commodity prices and the shaky global economy will weigh on export sector incomes over the coming months.

He says events in Europe seem to be deteriorating and a weaker Europe will translate to a weaker global economy.

Mr Smith says the key thing for the New Zealand economy will be what the New Zealand dollar does and the price of commodity export prices.

"If the New Zealand dollar holds up, this will be a factor impeding the economic rebalancing and economic activity in the New Zealand economy".

He says this is likely to lead to the Reserve Bank leaving the Official Cash Rate on hold for longer.