COMMERCIAL 1967 Must Be Year Of Adjustment

Press, Volume CVI, Issue 31305, 27 February 1967, Page 17

COMMERCIAL 1967 Must Be Year Of Adjustment

Now that the Government has announced some of the measures it proposes to take to remedy the situation, investors naturally ask what the outlook for share prices in 1967 may be.

Share prices last week continued their decline and there are few signs that the New Zealand stock market will take a turn for the better soon. Since February 11, 1965, when the share price index reached an alltime high, the market trend has been down,

A number of large question marks raise more than casual doubts about the near-term outlook.

These involve consumer spending, the effects of tight money, the impact of labour’s expected drive for a wage increase, and the prospects for company profits. On the international scene there are such problems as the diminishing export earnings and the concomitant balance of payments deficit, the question of Britain’s entry into the Common Market and the safeguards New Zealand may obtain in that event Govt. Sphere But few would deny that the major uncertainty lies in the Government sphere, and especially in what further measures will be taken to curb internal demand. The greatest danger to the economy—assuming the Government succeeds in deflating internal demand—may be a cost-push inflation. The Keynesian philosophy - —Government intervention in the economy to stimulate demand—has by and large served New Zealand Governments well in the years since the war, but for quite a few years now the economy has been stretched taut in manpower, materials, production and credit, and demand has been excessive. Measures The measures to rectify such a situation (again in Keynesian terms) are slashes in Government expenditure, higher taxes—especially indirect taxes—and tighter money, or a combination of . fiscal and monetary restraints. 1 Of course, the removal of subsidies has the same effect ' as the raising of commodity ' taxes.

The Government’s ‘steady does it* policy relied almost

solely on credit restriction and for that matter has done so ever since the war. Critics now argue that the Government failed to rise to the most serious challenge of its term of office, that is to achieve balanced growth. Concern This is not as much hindsight and controversy as may be thought. From late 1965 many economists were concerned about the ineffectiveness of the credit squeeze, and for some time the Monetary and Economic Council has urged the Government to take sterner measures. During 1966 it was said repeatedly on these pages that the mild form of credit restraint then in effect was insufficient to steer the economy with the accuracy that was needed. Further Steps The Government has announced some of the rectifying measures now. It is to be hoped that the Government

will not be tardy in taking further steps. There need be little fear of over-reaction at this late stage. Past inaction has already done much damage in the share market, in financial markets and in the sharp escalation of interest rates and their impact on business, consumer and investor. Economy’s Needs What seems needed for the economy now is a delicate blend of high though not excessively high interest rates, judicious allocation of credit, real statesmanship on wages and prices by labour and business and much restain in Government spending. But more important, the Government must announce whatever further measures it intends to introduce as soon as possible. The dispelling of uncertainly alone will have a therapeutic effect.