Dearer borrowing as inflation eases

Press, 15 May 1985, Page 40

Dearer borrowing as inflation eases

Wellington reporter The National Bank predicted inflation should ease later this year, but warned that business activity may suffer as businesses find it more difficult to borrow. In their latest monthly outlook of business prospects, the bank's economists report that the Government’s tight monetary stance has not yet exerted any deflationary influence on business activity. Funds have generally been available for those who want them, they say, but at a higher cost than before.

The result has been an imbalance between a strong demand for funds and a limited supply, being absorbed largely within the banks in the form of higher lending-deposit ratios. The economists warn that this cannot continue.

“If business activity continues along its present path, the effects of the monetary brake which the Government has applied will become more apparent. Businesses will find it more difficult to borrow and the cost will remain high,” they say. Inflation should ease, but the level of activity may suffer as well.”

Retailers surveyed in April still expected a modest expansion of turnover, as they had done a month earlier, the economists said. They said retailing was stable. Many retailers who five months ago were planning to reduce stocks through the summer now intended to keep them near current levels over the next six months.

There was high activity in residential and commercial construction, the economists said, but an expectation that builders involved in house construction would see a deterioration in business conditions and an easing in activity in late autumn and early winter.

Some evidence of this was the 1682 building permits issued in February, which were 10 per cent down on a year ago. The economists said a more optimistic note was struck by the commercial sector, where the same level of activity as the summer seemed in prospect. They noted, however, that building costs, particularly materials, seem likely to increase by more than the general rate of inflation through this year. Some builders also indicated the imposition of the goods and services tax could influence construction activity over the rest of 1985. Looking past next April, when the tax is scheduled to be imposed, most builders in the survey expected construction falling below current levels as

the GST’s initial impact was felt. The bank found that manufacturers were well awake to the dangers of excessive stock-holding. The survey suggested that it was unlikely that a reduction in demand emerging in 1985 would lead to a build-up in

finished stocks. Sales expectations for the 12 months ahead picked up in April, although the proportion expecting expansion moved back to a level recorded last November. A quarter of respondents remained optimistic about future prospects.