Economy in upswing — NZIER

Press, 9 December 1983, Page 11

Economy in upswing — NZIER

By

ADRIAN BROKKING

The economy is at present in the upswing face of the business cycle, says the N.Z. Institute of Economic Research in its “Quarterly Predictions” of December, released yesterday. By September many sectors were experiencing significant growth, having gone through the bottom of their cycle in the June quarter or earlier.

The institute estimates that the expansion of gross domestic product (GDP) for the year ended March next will be in the range of 1.5 to 2 per cent. All main sectors — except government services — will benefit from the expansion, especially construction. In expenditure terms the main additional thrust comes from the major project investment programme (as it has since 1981) and from exporting. The world recovery means more manufactured exports, the report says, and better prices for agricultural exports. Some agricultural exports will come from last year’s held-over stocks. Some domestic res-

locking by manufacturers and merchants is also expected.

Inflation is expected to remain low for the remainder of the year. The institute’s estimate of the increase in the GDP deflation (which measures economywide prices of production) is 5 per cent for the current year, compared with 13 per cent last year. The consumer price is expected to rise 4 per cent from March to March, against 12.6 per cent for a year earlier. However, the institute is not so optimistic over the value of gross farm production, which has been revised downwards to $5205 million. Prices for sheepmeats and dairy products are forecast to be weaker than initially expected, because of low demand in overseas markets and large overseas stocks.

Production in these sectors now looks to be greater than previously anticipated.

The higher prices received for wool and beef in recent months are ex-

pected on average to continue.

Total farm operating surplus will use 4 per cent to $1905 million; this includes SMP payments of $220 million — paid primarily on sheepmeats.

Neither is the institute optimistic over unemployment, which is not expected to diminish.

There was a major labour shake-out at the end of last year, involving a loss of around 13,000 jobs by redundancy and attrition. By March next year employment may still not have recovered to the level of September, 1982, the extra output coming from higher productivity rather than from extra jobs. Some slowing down of the economy is seen in the March 1984-85 year, with a GDP volume increase of only 1 per cent. Less investment in major projects, and a reduction in exports will only be partly compensated by increases in private investment. House permit applications may rise from 16,000 to 20,000 this year and 22,000 next year.

In addition, the Government’s expected economic policies next year are no more expansionary than those adopted this year. A small general wage adjustment early next year will not markedly boost spending power, and much of the 1 per cent volume growth in consumption will come from a deterioration in the personal savings ratio.

The Government deficit is estimated at 9.9 per cent of GDP this year, and 8.7 per cent next year.

The effect on inflation would be an increase in the GDP deflator of 7 per cent in 1984-85 and an increase in the consumer price index of up to 6 per cent. As a percentage of GDP the external deficit is projected as 6.0 per cent last year, 4.0 per cent this year, and 4.5 per cent next year.

These deficits mean that the potential for monetary expansion will be high relative to the rise in nominal GDP, despite continuing and perhaps increasing real interest rates, the institute says.

The failure of the November tender of government stock to meet its target is a warning that monetary policy is fragile. It is here that the Government’s strategy to constrain inflation remains most vulnerable. Assuming that the Government maintains its stance of restraint in public expenditure and lew wage increases, it could still fail, as it did in 1981, to achieve monetary control.