THE PRESS THURSDAY, DECEMBER 30, 1982. Clouds in the forecast

Press, 30 December 1982, Page 10

THE PRESS THURSDAY, DECEMBER 30, 1982. Clouds in the forecast

Any forecast for New Zealand on the eve of 1983 would have to take note of the economic clouds on the horizon, even though we have already had some storms. During the last 12 months the country’s terms of trade have continued to decline, markets for exports have become harder to find, world prices for New Zealand's principal exports have weakened, unemployment has risen, and continued high rates of inflation prompted the Government to impose a 12-month freeze on incomes and prices.

The freeze will reduce the rate of inflation, though it will not stop inflation. Its dampening effect on the consumer price index is already evident and will become more pronounced in the first half of next year because the inflationary pressures of pre-freeze and Budget adjustments have taken this long to filter into the economy. The reduction in inflation might be only temporary - much will depend on what mechanisms, as yet unannounced, will be used when the freeze is due to end on June 22. Although many people suspect the price freeze, and some deplore it, and many more condemn the incomes freeze and some are hard done by it, a demand for an immediate end to both parts of the freeze is not commonly heard. The question most anxiously asked is: What happens next? The other economic trends of the last 12 months are likely to continue. The Prime Minister, Mr Muldoon, has predicted on several occasions that unemploymenthas reached a peak, but the number of people on special work schemes or on the dole has continued to increase. The most optimistic outlook now is that unemployment will continue to rise for several months yet, peaking about the middle of the year, and declining only slowly after that. The imponderables are many. The most significant of them is the United States economy, which is said to be showing signs of a permanent recovery. Similar predictions in the last 18 months or so have proved premature; if the improvement is sustained, New Zealand and its unemployed should gain a delayed benefit toward the end of next year. Rejuvenation of the United States economy will be reflected in most Western economies and stimulate world trade generally, though, unfortunately for New Zealand, the stimulus is unlikely to apply to agricultural produce to any marked degree. New Zealand relies heavily on the income from exports of meat, dairy produce, and wool to buy from overseas the fuel, machinery, and raw materials needed tn maintain production. Big surpluses of meat and butter in the United States and the countries of the European Economic Community have caught New Zealand in a squeeze. World prices for these vital exports dropped as a result, and traditional markets in the United States and Britain have become oversupplied; New Zealand is also facing sterner competition from former customers in such new markets as are opening up. The latest slump in wool prices and the depressed prices for meat overseas have serious implications. Wool prices at the

last sale, in Auckland, were the lowest for two seasons. They came in the middle of the selling season, which does not augur well for any marked improvement in prices for the rest of the clip. New Zealand began the meat season this year with large stocks in store. Much of this is being cleared in large contracts to the Middle East, but it is a buyer’s market and prices are less than premium. Reduced quotas from the E.E.C. will probably mean that once again next year New Zealand will begin the killing season with large stocks on hand.

These difficulties are likely to be made worse by an increasing trend towards protectionism, particularly in the United States and Europe. The recent Geneva talks on the General Agreement on Tariffs and Trade failed to come to grips with this trend, which now seems certain to intensify and to make it even harder for New Zealand to find markets for its production. An economic forecast by the Organisation for Economic Co-operation and Development issued last week suggested that weak export prices would probably lead to a further deterioration in the balance of payments, with the deficit rising to about 8 per cent of gross domestic product. Increased sales will be difficult to come by; they will be necessary if some of this deterioration is to be offset. The only other course is to engineer the economy so that New Zealand will spend less overseas. The restraint on incomes is already tending to restrict overseas orders. The .trouble with this is that the result is likely to be more unemployment in New Zealand. The alternative is to borrow abroad to fill the gap.

New Zealand’s indebtedness overseas is now more than $6500 million. In dollar terms, that is about five times the official debt of seven years ago, when the present Government came to power. Adjustments for inflation and increased returns for exports, however, have meant an effective reduction in those seven years from 50 per cent to 12 per cent when the debts to be met in any one year are expressed as a proportion of export income. As long as this state of affairs continues, New Zealand is unlikely to have difficulty rescheduling overseas loans or raising extra money for capital development. The account will have to be settled sometime.

Some of the increase in debt has been in loans raised for the big energy projects that should reduce the need for imports; at least some of the schemes should provide extra export income. Until these schemes are in production and until their output is having a favourable effect on the country’s balance of payments, the Joans they have made necessary will have to be met from diminishing returns from other exports. Predictions are beset with a host of variables and most of the ifs in New Zealand’s economy are beyond the country’s control. To assert otherwise would be to contrive a fatal illusion. An improvement might come sooner than expected; more probably it will not come in 198?. The freeze is not likely to end in June.