Our calculations suggest there was a substantial rebound in the fourth quarter.
The strength of company profits could be the surprise for market watchers when the fourth quarter current account deficit figures are released tomorrow.
Westpac chief economist Brendan O'Donovan is forecasting the deficit (the difference between what New Zealand earns and spends overseas) to have shrunk to 2.3% of GDP in December from an "eye-watering" 8.7% in December 2008.
Some one-off factors contributed to the decline, but it was mostly a product of the drawn-out recession that began in 2008.
"With the economy regaining momentum, the improvement in the deficit has now run its course.
"We expect to see a substantial rise in the underlying deficit in the December quarter."
In seasonally-adjusted terms, the trade balance remained strongly positive in the December quarter.
Exports held their ground through the global recession and imports had only risen modestly to date and remained around 20% below their mid-2008 peak, Mr O'Donovan said.
The services balance deteriorated slightly, with the stronger New Zealand dollar clawing back most of the benefits of a strong tourist season.
The modest growth in goods imports also meant higher transport costs.
Westpac expected to see a significant rise in the investment income deficit, specifically on the outflow side.
"The profits of overseas-owned firms, the largest component of the deficit, fell sharply during the most severe part of New Zealand's recessions.
"Our calculations suggest there was a substantial rebound in the fourth quarter, though normal quarterly variations may be overstating the improvement in the overall trend."
The final act of the bank tax saga was another factor behind the higher deficit.
In December, the major banks reached a settlement with the IRD whereby they would pay 80% of the assessed amount of tax owed on structured finance provisions, Mr O'Donovan said.
In most cases, that meant they had over-provisioned in the second and third quarters.
Write-backs in the fourth quarter added $379 million to their bottom line and to the income deficit.
The tax payments reduced the deficit by $1.65 billion last year, equal to 0.9% of nominal GDP.
It was likely the annual deficit had reached the bottom of the cycle.
The deficit would soon start to climb again.
Import spending was rising, company profits were improving and banks' tax provisions would start to drop out of the annual balance by June.
Westpac expected the deficit to return to a sustainable balance of about 5% of GDP by the end of 2011.
