M.P. predicts fast rising inflation

Press, 4 May 1984, Page 3

M.P. predicts fast rising inflation

Parliamentary reporter A pre-election wage order, rapidly rising inflation starting next month, and an increase in unemployment up to 140,000 by next March are forecast in an economic report by Labour’s finance spokesman, Mr R. 0. Douglas. Mr Douglas yesterday predicted that because of the Government’s present economic policies 1985 would be an even more difficult year to cope with than had been previously expected. Although he conceded that the low wage order and lower interest rates would hold prices down further than had been thought likely, this would be offset by the availability of more money, which would both encourage more imports to be bought and push up property prices. Mr Douglas said that business confidence was at a peak, because of the overseas economic upturn, the “huge” Budget deficit, easing in monetary conditions, and expectations of election-year growth.

“However, business planning horizons are fairly short and there is considerable uncertainty over Government policy,” he said. There was a general reluctance to make longer term investment decisions, he said. Mr Douglas predicted that the Government would run its full term this year and campaign for the election on issues such as “think big” and voluntary unionism. The campaign would be underpinned by an economic stimulus similar to 1978 and 1981, and by improvements in the labour market, but all the “adverse” effects of this policy would fall in 1985. Mr Douglas last issued an economic report in November. Since then, he said, the Government’s policy had become clearer. It had taken a tougher stance on prices than was originally thought, approved a lower wage order than expected, and campaigned more strongly to reduce interest rates. These factors would tend to hold price increases to a lower level than he had expected last November, he said, but the Government had been much laxer in controlling the money supply than had been expected. The Government appeared to be trying to

channel money growth into short-term output growth rather than into prices, he said. Consequently, gross domestic product was now forecast to rise faster than was earlier thought, and more in line with economic expansions in the 1978 and 1981 election years. Private consumption had “bottomed out” and was now rising because of the growth in private sector credit and increased employment. However, fixed capital investment in plant and building by business would remain static, though an expansion could be expected with an election year.

Mr Douglas said he believed that farm investment would remain stagnant, reflecting poor export prices and declining farm incomes. Building activity was now buoyant but would decline by mid to late-1984 because of the difficulty in obtaining finance. Business inventories were very low compared with sales, and business was at present restocking, he said. Business profits would benefit from the tight control on wages and interest rates, and the phenomenal rise in the sharemarket in 1983 had already anticipated this. He said he thought public expenditure in goods and services would remain static in 1984 and 1985, but real growth in Government spending would occur in debt-servicing and social Welfare spending, such as unemployment benefits. This would be balanced by drops in S.M.P.S and expenditure on the bigger projects. Wage rate growth had been low, but another wage

order was “probable” before the election to “temporarily boost disposable incomes and consumptions.” Unemployment had reached a plateau because of seasonal factors and some improvement in the labour market, but would rise again by mid-year, reaching 140,000 by March, 1985. Consumer prices had also “bottomed out” at 3.5 per cent in the March quarter. With rapid growth in money and credit, and a big number of price catch-ups likely, the rate of inflation would rise rapidly from June.

The current account deficit would grow as more imports were bought, possibly reaching $2500 million by December, 1984, Mr Douglas said. He predicted that the Budget deficit would be about $3lOO million compared with $3OOO million this year.