Devaluation effect study by Bernz

Press, 11 March 1983, Page 12

Devaluation effect study by Bernz

The devaluation of the New Zealand dollar will reduce disposable incomes by 1.7 per cent in the year to March 31, 1984, according to a study by Beri Econometric Resources NZ. Bemz, which had programmed its Macro-econo-mic model of the economy to determine the impact of the devaluation, had forecast one month ago that household disposable income would decline by 0.6 per cent during the period. In the 12 months to September this year, incomes were expected to grow one per cent. Now they are ex-

pected to grow by only 0.5 per cent. The Bemz economists told journalists that it appeared the amount of tne devaluation was finely tuned so that inflation growth could be tightly controlled and be. at or near single digit annual figures. Bemz is forecasting that the consumer price index will now stand at 10 per cent by September, rather than the 8.6 per cent figure forecast before the devaluation. For the year to March next year the CPI rate is now forecast to be 10.8 per cent, rather than the 8.7 per cent

forecast before Tuesday. .Forecasting for 18 months is more uncertain. But on current trends, Bemz is expecting the inflation rate for the year to September 1984, to be 11.3 per cent, rather than the 10.4 per cent forecast before the devaluation. The Bernz economists say the devaluation which will raise the cost of imported goods and materials will cause consumer prices to rise 2.1 per cent in the year to March. 1984. “In the year to September this year the impact will be only 1.4 per cent as the full impact on prices will not have become apparent by then.” There is always a lag in the community and the index absorbing the impact of the new costs. “Given the need for New Zealand to devalue along with Australia in order to preserve balance in transTasman trade, it is clear that the impact on domestic inflation was the over-riding consideration of the Government in setting the actual size of the devaluation.” The economists believe that the Prime Minister, Mr Muldoon was anxious for the inflation rate to stay at 10 per cent or less for the period leading up to the 1984 election. The household disposable incomes figures include a predicted $l5 a week wage order at the end of the wage freeze in June, and a wage round at the end of the year where the limit will be a five per cent increase. Bemz have not altered their predictions as to wage movements in the light of the devalua-

tion. Because disposable income will be down, spending also is reduced. Bemz estimates growth in consumption will drop from a 0.5 per cent increase to a 0.2 per cent increase for the March, 1984, year. The total volume of sales is not likely to be affected because the fall in domestic demand will be offset by increased demand for New Zealand exports. Domestic production will be stimulated because of the increased cost of imports. Bemz is forecasting an increase in the gross domestic product for the March, 1984 year of 2.5 per cent instead of 2.4 per cent. The number of people employed in full time jobs is expected to increase slightly with the increased domestic production. This is not expected to affect the unemployment levels. Exports are expected to rise, in volume terms, by one per cent. But imports will not drop as dramatically because many are related to the construction of major projects. Bemz is expecting that the current account of the balance of payments will be $2204 million for the year to March, 1984, down $443 million on pre-devaluation predictions of $2647 million. For the September, 1984, year the deficit is expected to be $1765 million, rather than the $2253 million figure predicted before the devaluation. The economists say they are not expecting the nonwage part of the deficit to change much.