Inflation rate of 16 p.c. predicted by institute

Press, 21 December 1981, Page 1

Inflation rate of 16 p.c. predicted by institute

PA Wellington The Institute of Economic Research expects New Zealand’s inflation rate to rise about 0.5 per cent to 16 per cent in 1982.

In its regular quarterly prediction, made in a booklet issued today, the institute predicts a 19 per cent increase in salaries and wages, including, an increase in hours worked and some employment growth but insufficient to reduce unemployment significantly. The institute said that its underlying assumptions were a general wage order of about 5 per cent in mid-1982 and a wage-round settlement of about 11 per cent. It said, “This is sufficient to keep employee incomes abreast with expected price inflation provided that the Government reduces personal taxes sufficiently to offset fiscal drag.” The rapid economic growth of recent months would slacken in 1982. While real output' was growing at an estimated annual rate of 3.5 per cent during the 198182 year, an increase of only 1 per cent was forecast for 1982-83. A renewed advance in growth was likely from 1983 onwards.

The economic slowdown abroad meant that the institute had had to alter its original expectation that growth in 1982-83 would be maintained at a similar rate to this year’s. A general upturn in the world’s economy was not now expected until mid-1982 or late 1982. Export receipts would grow less rapidly and the deficit on the external

balance was expected to

exceed $2OOO million, equalling 6.2 per cent of gross domestic product, the highest proportion since 1975-76. Of this deficit, $BOO million would be attributable to air-

craft purchases and capitalequipment purchases for the “think big” projects “coun-

ter-part capital inflows” or leasing arrangements would largely cover the foreignexchange requirements of those items.

“The remaining deficit on foreign-exchange transactions will be large enough, however, to lead to a slowing in the growth of the domestic monetary base and a marked tightening in monetary conditions,” the institute said.

The recent rate of expansion of the money . supply could be thought to point to a more rapid rate of inflation but increased spending on imports drained much of the increase in liquidity and some was being diverted into an increased demand for assets such as houses, land, and financial securities, not all of which directly affected the standard measures of inflation. Its (the institute’s) forecast had been prepared in the period leading up to the last General Election and assumed a continuation of the then policy of the Government. Under the heading, “Agricultural operating surplus” the institute said that output was expected to fall by 1.5 per cent by volume. With low prices for meat and wool and rapid input-price rises, the operating surplus was forecast to rise by only 11.5 per cent, even with the aid of minimum-supplementary-price payments of $l4O million.

■ “A 1 per cent rise in output and faster price rises for outputs than inputs still only gives a 15.5 per cent rise in operating surplus for 1982-1983 under the assumption that S.M.P. prices are not raised significantly,” the Under the heading, “Other operating surplus," the institute said that rapid expan-

sion during the initial quarters of 1981-82 had led to 22.5 per cent growth for the year. The predicted economic slowdown would result in growth of 13 per cent in 1982. Real growth of 2.5 per cent in private consumption was forecast for 1981-82 and an average rate of real growth of 1 per cent was predicted in view of an expected easing back of growth rates in 1982-83. Consumer prices were forecast to reach a peak rate of expansion of 16.5 per cent in the middle of 1982 but to ease back in the last quarter of 1982 and in early 1983. Of public consumption, the institute said that real growth of 0.75 per cent was expected in 1981-82 to give a nominal growth rate of 22 per cent. Real growth of 0.5 per cent was expected in 1982-83. Investment in building work, plant, and machinery was expected to increase strongly initially but to slow down in 1982. Expected real growth was 17 per cent and

12.5 per cent in 1981-82 and 1982-83 respectively. Of public capital formation, the institute said that with involvement in major projects and Air New Zealand purchases, real growth this year was expected to be 4 per cent, with a similar figure estimated for 1982-83.

Poor wool prices meant that only a small reduction in the Wool Board’s stockpile was forecast. A slight increase in commercial stocks was forecast for 1982-83. Of exports, the institute said that a rapid rise of 8 per

cent in volume during 198182 was illusory. “Some is due to abnormal meat-slaughtering patterns, shifting exports from 1980-81 to this year; and butter imported from the United States and re-exported adds substantially to export volumes.”

Weak beef and forest-pro-ducts prices were expected to improve only slowly over the next 18 months. Exports were forecast to increase in 1982-83 1 per cent and 16.5 per cent in price. Of imports, the, institute said,. “The importation of Boeing 747 s and capital items for major projects contribute to growth in imports of 31.5 per cent in 1981-82 and 22.5 per cent next year. The volume growth, excluding special-items, is expected to be 5 per cent this year and 6 per cent next year. Assuming a 6 per cent devaluation in each year, the price increases are forecast to be 15 per cent in 1981-82 and 15.5 per cent in 1982-83.” The institute said that the Budget deficit for 1981-82 would be $2950 jnillion excluding S.M.P. payments of

$l4O million.. The deficit for 1982-83 would be $2235 million.

A substantial tightening of monetary conditions was expected next year if there was no change in monetary policy. This would result from the “large drain from the balance-of-payments deficit.”