Inflation and wage rises predicted

Press, Volume CXIV, Issue 33650, 27 September 1974, Page 3

Inflation and wage rises predicted

f.Vew Zealand Press Association) WELLINGTON. September 26. Accelerating inflation, a 14 per cent rise in the price of goods, a 201 per cent rise in wages, and poor prospects for higher meat and wool prices are among the latest quarterly predictions of the Institute of Economic Research.

The predictions—prepared before yesterday’s announcement of a 9 per cent dollar devaluation —contain a note saying that devaluation’s main effect will be to raise the New Zealand dollar price of both imports and exports.

But this would apply for, only half the 1974-75 period covered by the institute’s predictions. it said. Any effect! on the balance of payments! arising from associated changes in volume was likely; to be small. The price change itself was; unlikely to affect the volume; of exports significantly with-; in the next six months, and equally ordering and supply; lags would prevent any sub-; stantial reduction of the! volume of imports for 197475 The main effect of the exchange rate change, apart; from the slight possibility of; short-term capital inflow, was more likely to be felt in! 1975-76, said the institute. Further drop In its summary, the insti-l tute said New Zealand was| now meeting only one of the) three traditional short-term! economic objectives of full employment, price stability! and external balance. Employment remained high! and output continued to ex-1 pand, it said. A recovery in! farm production after last! year’s poor season would off-; set the effect of slower; growth in other sectors. I Tight liquidity, the rela-| tively restrictive fiscal; stance, falling farm prices,; and the adverse trend of the international economy all! indicated a further slackening!

in non-farming output growth during 1975. Dearer imports Inflation continued apace and was likely to accelerate in the months ahead under the influence of rapidly rising import prices and income escalation in New Zealand. The G.N.P. deflator was expected to increase less rapidly in 1974-75 than in 1973- (from 12 per cent to about 84- per cent), but this 'deceleration would result entirely from falling export and farm prices, said the institute. The price of goods entering public and private final expenditures in New Zealand was likely to increase as much as 14 per cent in the 1974- fiscal year. Although the consumers’ price index, which relates only to private consumption, might not show so fast an increase, the next few quarters were likely to bring faster increases in the index than in the earlier part of 1974.

Farm prospects Since the institute's previous quarterly forecast, meat and wool prices had fallen further, and the prospects for a substantial early recovery were not good. Export receipts would decline further and this, coupled with a continued rise in the value of imports, seemed likely to carry the balance-of-payments deficit to about s7oom in the 1974-75 March year. “There are grounds for thinking that the import surge will pass its peak by the end of our forecast period and this, with the prospect of some recovery in export prices as the season progresses, suggests the possi-

bility of some improvement in the over-all balance.” Salary and wage payments are forecast to increase 204 per cent during 1974-75—the main contributing elements being the July r and prospective January increases. Farming income is now estimated to have fallen only 1 ,per cent in 1973-74 (com- : pared with the last estimate of a 7 per cent fall) but the institute still expects a substantial. 36 per cent, decrease in 1974-75. Lower incomes Because of the large addition to stabilisation reserves in 1973-74. and the availability of these reserves to supplement incomes in 197475, the change in incomes in the hands of farmers would 5 be much less marked: never-1 theless, farm incomes would ! fall significantly in real terms! and some decline in the volume of farm spending was probable.

“The fall in farm incomes and the probable slackening in growth in other sectors suggest a much slower expansion in company incomes in 1974-75. We forecast that pre-tax profits will increase 12J per cent, compared with 324 per cent last year.” Private consumption continued to expand rapidly but some slight slackening in the rate of increase seemed probable, said the institute.

“A sharper decline in the rate of increase in private capital formation seems likely. We forecast that this item will expand 17| per cent in 1974-75, and expect that the rate of increase will slacken further as a result of the tight liquidity situation and the general deterioration in the economic outlook.”