Rise in consumer prices of 16.5 p.c predicted

Press, 10 February 1982, Page 1

Rise in consumer prices of 16.5 p.c predicted

Wellington Reporter

A slowing in the rate of growth of gross domestic product, a rise in consumer prices of about 16.5 per cent, and ah increase in the bal-ance-of-payments deficit are among the prospects for the New Zealand economy in the coming year.

.They are part of the conclusions of the annual economic survey of New Zealand by the Organisation for Economic Co-operation and Development, released today. ' The survey also predicts an increase in unemployment numbers of just under 1. per cent, with the over-all rate of unemployment unchanged at about 6'5 per cent of the workforce.

According to the survey. New Zealand's domestic demand for goods and services is expected to rise about 1.5 per cent, gross domestic product (G.D.P.) about the same, compared with 2.5 per cent last year, and the balance of payments deficit to rise to 4.5 per cent of G.D.P. (3.2 per cent last vear).

The predictions are based on several assumptions on the world economy and also on the belief that fixed investment in New Zealand, including the investment associated with the. large-scale development projects, will slow down from the very rapid growth of a probable 9.5 per cent last vear.

Household incomes in 1982 are expected to increase by about 20 per cent, slightly faster than in 1981. However, in the absence of changes in tax rates, the rise in household incomes is likely to be severely reduced by fiscal drag (implying an increase in average lax rates from 24.5 to 26 per cent).

Set against a 16.5 per cent increase in consumer prices, real disposable incomes mav show no growth between 1981 and 1982. although a further fall in the saving ratio is expected to yield growth in the domestic -demand of around 1 per cent in real consumption. ■

big projects are expected to provide the main force behind private fixed investment. but that some uncertainties have recently arisen about two of the projects. Given both the general world outlook and parallel uncertainties in Australia, the survey assumes that the growth of investment in the projects will be less than that al first envisaged. Exports are expected to slow in response to morenormal seasonal conditions and weaker price developments on world markets. Import volumes are also expected to decelerate after their rapid growth in 1981 in response to the investment programme, but in 1982 are

still likely to be running ahead of exports. With little change in the terms of trade, the external deficit is expected to rise from $llOO million to $l5OO million in 1982.

Consumer prices have slowed during 1981 and the survey suggests that the outcome for the year as a whole is likely io be an increase of 15 per cent, compared with 18 per cent in 1980. According to the survey, the principal cause for the slow-down was the movement of import prices, from an increase of 24 per cent in 1980 to one oi just 14 per cent last year. • A further deceleration in import prices is forecast. m

12 per cent in 1982. but the benefits of this slow-down seem likely to be eroded by an acceleration in average earnings and from the rapid increase in money supply apparent in the partial statistics for 1981 and implicit in the fiscal stance for the remainder of the financial year.

The survev pavs particular note to the'change in fiscal and monetary police since the last survev. in ' March, 1980. from moderate restrain! to strong expansion. This change was brought about in response to rising unemployment and a decline in farm incomes, first bv a reflationarv package introduet ii late m 1980 and second

when the pace of the expansion was confirmed in last .year’s Budget. . As a result of this reversal of policy and the strong growth in fixed investment associated with the largescale development projects, it is likely that real G.D.P. and total domestic demand for the present financial year

will reach about 2.25 and 3.5 per cent respectively — in both instances the fastest rate of growth since 1975-76. The survey goes on to say "As noted in the last O.E.C.D. economic survev. expansionary policies were pursued in 1975 and 1978. but were followed with deflationary measures in 1976 and 1979.

"In view of this history of short-term changes in the direction of demand management .' arid the ' need for greater stability of policy.— recognised in' the 1919-80 Budget, in the Reserve Bank annual report for 1981. and discussed in the conclusions of the last O.E.C.D. economic survey - it is unfortunate that a large fiscal expansion should have been initialed in 1980. at a time when the prospects already in.train for the recovery oi fixed investment presented an opportunity for a more sustainable recovery in economic growth.

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