Brighter signs seen for N.Z. economy

Press, 19 June 1986, Page 22

Brighter signs seen for N.Z. economy

ADRIAN BROKKING

By

There are grounds for optimism over the New Zealand economy, although during the last three months there have been confused signals about the progress of the recession, says the Institute of Economic Research in its June “quarterly predictions.” Registered unemployment rose only 6000 in the October to April period, retail sales continue to rise in real terms — albeit slowly — and the December quarter first estimate of gross domestic product showed a fall of only 0.6 per cent. GDP is estimated to have fallen in the second half of the 1985-86 year, but not for the year as a whole.

A further fall of 1.5 per cent is forecast for the current year, ending

March, 1987. Within the total the steepest fall is in investment which is expected to decline by more than 15 per cent in real terms, because of the squeeze on funds in both the public and the private sector, and the ending of most private sector “major projects.” Imports are likely to continue to fall sharply in volume terms (they fell 2.5 per cent last year) and to decline more than 5 per cent this year. Exports rose sharply in the year ended March 31 and are expected to rise 2 to 3 per cent, despite recent rises in the exchange rate. The rise in exports is helped by the growth of New Zealand’s overseas markets, at around 3 per cent a year. “These volume movements in trade, coupled with the falls in import

prices and the strong exchange rate, mean that the balance of payments improves markedly from a deficit of $2500 million in 1985-87 on the current account, to one of only $lOOO million this year,” the report says. “The relative strength of the current account, the Government’s financing needs, the money supply controls, and the rates of price inflation in New Zealand and overseas, lead us to forecast that the trade-weighted exchange rate will tend to fall by some 10 per cent during the period to March, 1987, leaving it at the same real level, as in the first quarter of this year.”

The institute forecasts an increase in the domestic deficit of $2500 million because of the $lOOO million decline in tax revenue after GST. This boost to the econ-

omy is likely to start an economic recovery in 1987. It assumes that the Government will continue to fully fund the deficit, and that money supply growth will continue to decline. But current expenditure is likely to continue rising in real terms, it says, and the brunt of the measure will be borne by investment. In conclusion, the institute says that the prospect is fair that the process of change will become easier to achieve as sectors absorb resources from those that are declining, rather than the economy as a whole moving downwards. However, the institute warns that the statistics may be confused by the rapid changes in the economy, and the differences between the various sectors.