O.E.C.D. sees rising unemployment, inflation

Press, 1 June 1985, Page 3

O.E.C.D. sees rising unemployment, inflation

By

HUGH BARLOW,

NZPA staff correspondent • London Rising unemployment and double-digit inflation are likely short-term consequences of the Government’s moves to redress imbalances in the New Zealand economy, according to the Organisation for . Economic Co-operation and Development yesterday. In its twice yearly report on economic trends and developments in O.E.C.D. member countries, the Paris-based organisation said the Government had made a “comprehensive attempt” to grapple with the country’s problems.

It had set out a three year programme of fiscal savings and an active debt policy was being used to limit monetary growth.

: Controls on wages, prices, interest rates and movements of foreign exchange had been lifted in an attempt to let markets function more flexibly. “However, many of these

measures, including the 20 J er cent devaluation in uly, 1984, will have unfavourable effects in the near term,” the O.E.C.D. said. “Inflation is likely to be back in double figures for much of 1985. . “With interest rates close to 20 per cent, most elements of domestic demand seem likely to be depressed. “Output in 1985 may remain at around its 1984 level, but only if export growth remains buoyant. Unemployment is expected to rise. “The situation might improve somewhat in 1986 although much will depend on inflation developments.” It noted that the importance of not allowing any devaluation-induced rise in prices to feed through into a wage-price spiral would be considered in the tripartite talks preceding the September wage round. The O.E.C.D. said activity in the New Zealand economy appeared to remain more buoyant in 1984-85

than had been ? envisaged, with gross domestic product , increasing about 5 per cent.s Contributing factors were favourable' external conditions, a-’.strong growth in” farm incomes, a falling saving ratio, buoyant investment and generally loose fiscal and monetary policies. “The latter did not lead to an acceleration of inflation because of the wage and price freeze instituted in June, 1982, which was finally removed in November, 1984. “Although inflation was substantially reduced, the current balance deficit deteriorated to the equivalent of about 6.5 per cent of G.D.P. in 1983-84, while the fiscal, deficit rose to the equivalent of 9 per cent of G.D.P. “Taken with the high and increasing debt burden, these trends were probably unsustainable.” The O.E.C.D. said the present balance was likely to improve substantially be-

cause of depressed domestic demand and,the continuing effects on trade volumes from last year’s devaluation. In its general review of O.E.C.D. economies, the United States deficit was highlighted as a point of concern. “The medium-term sustainability of-growth in the United States, and hence in the rest of the 0.E.C.D., would appear to require significant action to reduce the structural portion of the United States Federal deficit. “Without such action, imbalances in the world economy could build up to unmanageable proportions,” the O.E.C.D. said. However, it said that it was not up to the United States alone to correct international; imbalances. Other countries had to consider the role their own policies might play in establishing balanced and sustainable .world economic conditions.