PRICE INCREASES BLAMED

Press, Volume CXIV, Issue 33581, 9 July 1974, Page 2

PRICE INCREASES BLAMED

IN.Z. Press Association) WELLINGTON, July 8. The main economic, social and political problem confronting New Zealand is the increasing rate of price increases, and not the balance-of-payments deficit, according to the chief economist of the Bank of New Zealand (Mr L. C. Bayliss). Speaking to the Wanganui Chamber of Commerce today, Mr Bayliss said the balance-of-payments deficit was largely self-correcting, although at the cost of a substantial reduction in business and farm investment. USUAL CYCLES Economic trends must be appraised within the three-to-four-year business or economic cycles which had occurred in New Zealand in the post-war period, he said. The cycles — of which New Zealand was experiencing its seventh — had expansionary and recessionary phases. In relation to previous cycles, New Zealand was

now at the peak, and showing all the customary signs — unsustainable rate of growth of domestic expenditure, shortages of labour and goods, high rates of importing and capital investment, shortages of finance, declining overseas reserves, and pressure on prices. “Large balance-of-pay-ments deficits reflect excessive stock accumulation and high imports of plant and machinery,” said Mr Bayliss. SHARP SWING “A year ago, there was a quite excessive and unbalanced degree of optimism; today there are signs of an excessive degree of pessimism developing. “The important thing to remember is that while economic and business conditions will undoubtedly be difficult over the immediate future, this period will be followed by the usual economic pickup.” Mr Bayliss said economic fluctuations could be moderated by Government action, but that such action had never been taken in New Zealand since it would require Government's implementing economic policies which would appear quite inappropriate to the prevailing economic situation. “In fact,; Government

economic policy has accentuated cyclical instability in the post-war period — applying the brakes just when the economy is turning down and the accelerator when the upswing has already started.” FURTHER FALLS Mr Bayliss said that international economic activity, which affected the New Zealand economy, would probably remain generally depressed in 1974, with further falls in commodity prices. The chances of a strong economic recovery seemed unlikely; the situation arose mainly from the increase in oil prices. The overseas exchange transactions current account amounted to $255m in the year ended May, 1974, compared with a $347m surplus a year earlier, said Mr Bayliss. A s4oom increase in import payments was forecast in the latest Statistics Department survey of import orders to November, 1974, and export receipts had fallen from $1844m to $1766m in the year ended May, 1974. The fall, he said, reflected lower price? particularly for meat and wool. The net invisible deficit for transport and tourism and the like had increased s4om in the year ended May, 1974, to

$227m, and a further s4om increase was likely by December. GREATER DEFICIT On those assumptions, Mr Bayliss predicted that the current account defies would increase to between ssoom and s7oom in the year ending December, 1974. “One of the major reasons for the large deficit is the very high level of investment in housing, farming, business, fixed investment and stocks,” he said. "This is high even by past cyclical peaks, and the balance-of-payments deficit is correspondingly larger.” Peak cyclical levels of investment had invariably been accompanied by larger external deficits. “Without any further Government borrowing, a s6oom deficit in the year ending December, 1974, would reduce New Zealand’s overseas reserves to $255m — a historically low figure,” said Mr Bayliss. DEAR MONEY The Government would not allow the reserves to fall so low, and would probably borrow between s2oom and s3oom. “Overseas interest rates are relatively high, and real costs of borrowing would be substantially increased by devaluation,” he said.