THE PRESS THURSDAY, APRIL 3, 1980. World recession predictions

Press, 3 April 1980, Page 16

THE PRESS THURSDAY, APRIL 3, 1980. World recession predictions

A world recession has been predicted for a number of months, even a year or more.' So far it has not set in on the scale predicted. This is not because several governments have not willed it, but largely because people in a number of countries have not reacted in the way that they were expected to react to certain economic measures. The rhetoric of certain governments, particularly the British Government, is about strict monetary policies. It is proving no easier to talk economies down than it has proved to talk economies up. Many comments were made about the severity of.the British Budget . late last month. Indeed, in some respects it seemed, as severe as theviews of Dr Milton Friedman who inspired it. These are early days, however, to judge how far it will be effective in dampening down the economy. In the United States,. President Carter is aiming for a Budget which will create a surplus of .$16,-500 million. The measures that he .announced recently to reduce Americans’ spending are likely to bite'deep. Various interpretations .of: what is happening are possible.. One of the clearest aspects is that a large number of governments have decided that inflation is the major economic problem they are facing. Some time ago unemployment had the highest priority in many Western countries. In two of New Zealand’s key markets inflation is high. Estimates of American inflation lie between 15'per cent and 18 per cent. In Britain much , will", depend on whether the wages settlement for an increase of . almost 16 per cent in the steel industry will be a model for other wage settlements. If it becomes the norm, perhaps inflation will be as high as 20 per cent in the coming year. Why do people go on investing in new capital when the rates at which they borrow are rising? Why do businesses go on producing and expanding when money is expensive? Why do unions go on making high wage demands when it is obvious that businesses already under strain might have to lay off staff? Is it not clear to everyone that inflation makes everyone worse off in the end? These questions and others'are the ones that governments throughout the Western world and throughout some developing countries as well are grappling with. No consensus can be found on the answers.

Possibly the explanation that comes closest is that a new inflation mentality takes over. It is such an attitude to prices that some governments are trying to break. . • In New Zealand, only a few years ago, price increases were being greeted with loud protest, and some consumer resistance. As soon as inflation trends were firmly set and once substantial price increases and wage increases became familiar the public outcry diminished and consumers became more resilient.- This did not mean that life became more comfortable or inflation less hurtful; it certainly meant that a momentum was established and became harder to interrupt. The measures taken by the United States and Britain might begin to have effects. This could come suddenly and might have a worse outcome than that intended. A world recession would hit New Zealand in a number of ways. If factory production in other countries dropped, demand <. for commodities would fall. In the instance of New Zealand the demand for, and price of, wool would fall. The forces of trade protectionism would also grow stronger. These curtail New Zealand’s exports directly; they also affect a number of countries to which New Zealand sells its products and which, finding their own markets elsewhere closing, would be less able , or willing to buy New Zealand goods.. Little has happened yet to suggest that the forecasts are about to be proved, but it must be hoped that if there is a recession then it will not be too sudden or too severe. Inflation is hurtful to almost everyone in a community and unemployment can sap hope and initiative. Both problems demand attention and their savage effects should not be needed to bring the wills of governments and people together. In practice the solution to which governments are still compelled to tiirn is the series of tough measures that by themselves are hurtful. So far these have been . avoided in New Zealand mainly because emphasis is being put on changing the directions in which economic resources are being put. The anti-inflation measures that are likely to have most effect on New Zealand are those which, like much of the inflation pressure of the past, come from events elsewhere.