Economy upturn likely soon

Press, Volume CXV, Issue 33941, 6 September 1975, Page 16

Economy upturn likely soon

f.Veto Zealand Press association) WELLINGTON, September 5. Given increased productivity, new export growth, and the opportunity to borrow abroad—at least for major investment projects—New Zealand’s economic prospects for the rest of the decade are good, according to the Monetary 7 and Economic Council.

But there is a danger that external payment problems could lead to a return to higher protection levels for manufacturing, says the council in its latest report, just as the inefficiencies permitted by quantitative import restrictions, and generally high levels of tariff protection, were starting to be overcome.

But the latest measures in incomes policy, and more generally, the recognition of the need to maintain wage and price controls, offered “reasonable hope for progressive reduction” in the cost inflation which had detracted from*New Zealand’s ecenomic performance in recent years. “This will continue, however, to be a difficult area for economic management because of the lagged relationship between wage and price increases, which makes it often hard for wage earners; to comprehend the import-' ance of wage restraints,” the council savs.

Although wage restraints, were often seen as more restrictive than price controls, in New Zealand wage increases had tended to keep ahead of price increases especially in periods of high economic activity.

! “From 1970 to 1974. weekly wage rates rose 70 per cent, while the consumer price index increased 42 per cent.” The council sounds a note of warning on the pricecontrol system applying at present. The real equity base of companies is being “seriously undermined,” it says. Some change in the basis for applying price controls, and tax assessments, is urgently required. “Wage and price controls ■ are clearly going to be important tools for some time ; to come in helping to mainlain. and improve, stability i in the New Zealand economy. The other major area for concern is that of “demand (management.”

Basic weakness Over successive economic cycles, the basic weakness in managing the economy had been the tendency to overstimulate levels of domestic demand as soon as export prices improved from the previous trough. As a result, when export eamings declined and foreign reserves were dissipated, it became necessary to restrain demand and imports. Because of the abruptness, and the extent, of the current decline in the balance-of- ; payments situation, the difficulties faced were exceptionally great. Even when trading conditions improved. New Zealand j would be working on more slender margins on its curlrent account than at any time i since World War 11. Demand inflation, of the tvpe experienced in 1973 and 1974 should not be allowed to recur, the council says. The Budget I Commenting on the Budget, ‘the commission says that it (“should go some distance towards checking the downturn r in the economy, maintaining employment levels and even allowing some growth in production this year.” Whether it proved inflationary depended on the combined impact of balance-of-payments developments, net Government internal borrowing, and internal monetary adjustments. The Budget’s incomes policy, providing for personal income-tax reductions in lieu of a wage order compensating fully for the cost-of-living increase, constituted a "breakthrough” in incomes policy. It offered at least the possibility of dampening the wage-cost-price spiral which had been the most destructive force in the economy in the five-year period. Indirect taxes It had been complemented in indirect taxes, especially petrol, which would broadly neutralise the effect on real disposable incomes. There were some measures to further assist agriculture in the Budget. However, it did not fully attend to the urgent requirement for farm income stabilisation. The council gives its support to present efforts by both the Government, and I producers, to devise and implement “acceptable price I ■stabilisation arrangements for (the areas of export agricul[ture not now protected from (cyclical fluctuations.” i The most serious problems [arose through the effects of

domestic inflation on farm costs, and as a result, on net farm incomes. Fann investment Farm investment had suffered. Attempts to stimulate it in recent years had failed. There was a need to encourage investment. Even if that could be achieved, however, the effects would take more than one season to show in the indexes of production. “Barring unusually favourable climatic conditions, the economy might have to live with slow agricultural growth for some time to come,” the council says.