THE PRESS WEDNESDAY, MARCH 26, 1980. A gloomy economic forecast

Press, 26 March 1980, Page 16

THE PRESS WEDNESDAY, MARCH 26, 1980. A gloomy economic forecast

An increase of 164 per cent in gross domestic product—the value of all goods and services produced in New Zealand—in the present financial year would normally be reckoned a satisfactory outcome. But this has been an abnormal year; inflation (as measured for national accounting purposes) has been 14j per cent, leaving a bare 2 per cent for growth in real G.D.P. This is the latest estimate of the New Zealand Institute of Economic Research in its latest quarterly predictions. The institute’s forecast for 1980-81 is gloomy: an increase of 111 per cent in G.D.P. measured in current prices, inflation at 134 per cent, and a dro.p of lj per cent in real G.D.P. The institute also predicts an increase in the balance-of-payments deficit: from $367 million in 1978-79 to §845 million this year and §895 million next year. Expansionary Government spending in 1978-79 was followed by more stringent financial policies this year, producing tight monetary conditions now. The institute expects “significantly weaker” demand, in real terms, next financial year. It is also predicting a decline in the terms of trade, “mainly because of weaker export price growth but also due to a further round of substantial import price increases.”

This is all bad news, and the country’s businessmen and farmers can only hope that the institute’s current forecasts turn out to be unduly pessimistic. The institute does not claim to be infallible—in fact, the latest forecasts are accompanied by a comparison .of previous forecasts with the actual outcome, as estimated by the Government Statistician. In November, 1977, for instance, the institute predicted a 12| per cent increase in G.D.P. for the year ending March, 1979; the Government Statistician’s estimate (published in January this year) showed an increase of 15.8 per cent in G;D.P. in 1978-79. “To some extent this was due to the relatively neutral policy assumptions we made in advance of the 1978 Budget,” the institute explains; but

instead of the “slightly expansionary attitude” of the Government expected at that stage, the “significantly expansionary fiscal and monetary stance” which followed led to bigger increases in Government spending and hence G.D.P. than predicted. This instance illustrates not only the inherent difficulty of forecasting broad economic trends but also the substantial impact on the economy of changing Government policies. The layman might well doubt the value of the effort involved in producing forecasts so prone to error. In defence of the forecasters, it must be said that decision-makers—in the private sector as well as in the public, sector—have to make guesses about the state of the economy months or years before investment projects come to fruition, and an informed guess is better than none at all.

The implications of the institute’s latest forecasts for today’s decisionmakers are, surprisingly, not all gloomy. For instance, a business firm or Government agency pondering the timing of construction for a new energy plant may read into these forecasts a declining demand for labour; 1980-81 would therefore be an opportune time to recruit labour for such a project. The Government, however, will find little joy in the forecasts. The declining terms of trade and the increasing deficit in the balance of payments will require further overseas borrowing—and probably further devaluations. The decline expected in the rate of inflation will still, the institute calculates, have the inflation rate above 10 per cent in the coming financial year. Continuing inflation, high unemployment, and worsening balance of payments in the year before a General Election are a fearsome electoral handicap for any party occupying the Treasury benches. A steady nerve and a firm hand on monetary and financial policies in. the early months of 1980-81 are the Government’s best prospects of weathering the next election with a workable majority—and of economic recovery beyond 1981.