Economy has peaked says Reserve Bank

Press, 29 June 1985, Page 3

Economy has peaked says Reserve Bank

PA Wellington New Zealand’s economy has peaked and will decline slightly over the remainder of the 1985-86 March year, according to the Reserve Bank’s unofficial econometric forecasts. The forecasts show that economic activity, as indicated by gross domestic product, reached a peak in the first half of 1985. “Thereafter the forecast profile of activity is essentially flat, with a slight decline over the remainder of 1985-86, offset by a moderate rise through 1986-87,” the Reserve Bank says. Although the GDP profile was essentially flat over the forecast horizon, it says growth in annual average terms for 1985-86 was projected to be about 1% per cent. This reflected the fact that economic activity at the end of 1384-85 was higher than the average recorded during that year.

Domestic expenditure was predicted to fall in the 1985-86 and 1986-87 years, but these falls would be offset by an improvement in the external balance as export volumes continued to grow strongly and import volumes declined. The current account deficit (on a balance of payments basis) was forecast to fall from about $2700 million in 1984-85 to about $2OO million in 1986-87. Consumer price inflation was forecast to have peaked, at an annual rate of just over 16 per cent, in the year to June 1985 and was forecast to fall steadily to around 9.5 per cent for the year to March 1987. Full-time employment was forecast to grow by 1 per cent over the year to March 1986 and to increase by a further 0.5 per cent over the year to March 1987. The Government’s Budget deficit for the year to March 1986 was forecast to be around $1250 million. “This represents a significant downward revision from previous forecasts and arises primarily as a result of large increases in forecast revenues particularly company tax receipts,” the Reserve Bank says. “A further fall in the

Budget deficit to about $930 million is forecast for 198687. No allowance has been made either for the GST or for possible income tax cuts in that year.” Personal disposable incomes were forecast to fall by just over 4 per cent in 1985-86 as a result of declining farm incomes, slower employment growth and a large increase in personal tax payments. In 1986-87, as inflation diminished the fall should be reversed to give a rise in disposable incomes of about 2 per cent. However, an expected return to more normal levels of savings in 1986/87, together with a return to more normal consumption patterns following the recent distortions caused by special factors such as the devaluation, implied that consumption spending should decline in both the forecast vears. The forecasts do not include the effects of the proposed goods and services tax. But the Reserve Bank said it was thought that the inclusion of GST would not alter the pattern of the present forecasts, apart from causing a one-off increase in the consumer price index.