Two years since the 20 per cent devaluation

Press, 19 July 1986, Page 28

Two years since the 20 per cent devaluation

In the two years since the New Zealand dollar was devalued 20 per cent (on July 18, 1984), significant changes have occurred in the country’s production, export and import patterns. This is the last of three articles that review some of the economic changes that have been measured in the term of the present Government and under the policies directed by the Minister of Finance, Mr Douglas. The earlier articles were printed last Saturday and last Wednesday.

Activity in the New Zealand economy slowed markedly during 1985 from a particularly high level in 1984. Gross domestic product, as measured by a Department of Statistics index, grew 1.5 per cent last year, after a record 7.9

per cent rise in 1984. In 1983, the index showed zero growth.

GDP began to contract in the second half of 1985, when the index fell 0.4 per cent over the September quarter and a further 0.6 per cent over the December quarter. A

similar fall-off in GDP was recorded in the second half of 1982, only then the decline was sharper. While the GDP index indicates growth during 1985 in forestry, fishing, mining and construction, and some service indus-

tries, it also shows marked declines in manufacturing, trading ,and agriculture. The manufacturing component of GDP decline 0.6 per cent in 1985, after a 14 per cent rise in 1984 and 3.2 per cent rise in 1983. The fall in output last year in-

creased in the last months, when the December quarter level was 3.3 per cent down on the preceding three months. Manufacturing showed growth rates of 2.5 per cent and 1.9 per cent in the December quarters of 1984 and 1983.

The agriculturral component of the index slipped 1.7 per cent last year, after growth of 5.8 per cent and 1.8 per cent in 1984 and 1983 respectively. In the September quarter of last year, agricultural output measured by the index declined 6.6 per cent, but then stabilised to show no contrac-

tion or growth in the final months of 1985. Manufacturing The decline in manufacturing export volumes in the latest March year was a notable 18 per cent A similar comparison between the March quarter volumes of 1984 and 1985 shows an 11.7 per cent increase. Between those quarters of 1973 and 1974, the rise was 31.5 per cent. The manufacturing export decline between the most recent December and March quarters was 26 per cent

Export volumes New Zealand’s export performance has slackened in the last year. The volume of all exports, as measured by a Department of Statistics index, was 17.7 per cent lower in the March quarter of 1986 that it was in the corresponding three months of the previous year. That reversed growth in exporting during 1984. Between the March quarter of that year and that of 1985, export volumes jumped 13.4 per cent In a similar comparison between 1983 and 1984, volumes grew 4.3 per cent. Import volumes The volume of imports, as measured by the index, rose 3.1 per cent between the March quarters of 1985 and 1986. Import volumes compared between the same quarters of 1984 and 1985 show a 2.2 per cent rise, while between 1983 and 1984, there was a 24 per cent jump. Export receipts Receipts from exporting have declined in the latest year after substantial growth previously. In the 12 months to last February, total export receipts of $8.07 billion, were 11.9 per cent down on those in the previous year, reflecting in part the relative strength of New Zealand’s exchange rate with some trading partners. In the year to February 1985, total export receipts climbed 18.2 per cent. Import costs Payments made for imports into New Zealand also dropped in the year to last February At $7.75 billion, they were 11.9 per cent lower than in the previous year. Import payments in the 12 months to February, 1985, rose 34.4 per cent from the year before that. The value of New Zealand’s exports began to rise in the first months of 1986, although it was still significantly below the value in the corresponding months of last year. However, import values in the first months of this, year also declined. The balance on merchandise trade for last April showed a surplus of $5.6M and that was only the third surplus for the 12 months. In April, 1985, merchandise trade showed a deficit of $29.6M. Terms of trade New Zealand’s overseas terms of trade fell to a record index low of 70 in the latest March quarter. The index, a ratio of import price levels and export price levels, slipped three points from the previous quarter. In March, 1985, the index stood at 74, at March, 1984, at 75, and at March, 1983, at 72. The index has been on a declining path since March, 1984. Payments New Zealand’s balance-of-payments deficit on current account reached a record in the year to March, 1986, of $2.87 billion. It peaked previously in the year to March, 1985, at $2.81 billion. The running deficit dipped in the intervening period but remained above $2 billion and significantly higher than before 1985. In the year to March, 1984, the balance-of-pay-ments deficit was $1.35 billion. That was accompanied by a surplus in the balance of payments and receipts on merchandise trade. The surplus in the March quarter of 1984

was $5Ol million. Quarters since then have seen the balance slip into deficit, amounting to $558.4 million in latest March quarter. Overseas debt New Zealand’s total indebtedness to the rest of the world jumped 50 per cent between March, 1984, and March, 1985, largely because of exchange rate fluctuations. Total private and public sector debt held, overseas was $24.75 billion in March, 1985, an increase from $16.49 billion a year before, and from $14.72 billion in March, 1983. Overseas borrowing by Government departments and the Reserve Bank was by far the largest component of the total debt, at $13.92 billion in March, 1985, up from $9.17 billion two years earlier. In the year to March 1985, 64.5 per cent of the growth in New Zealand indebtedness can be attributed to exchange rate changes, particularly the devaluation of the New Zealand dollar in July, 1984, and the strength of the United States dollar. The Reserve Bank estimates 'the total overseas debt started to decline after March, 1985. Estimates put the debt as at last September at $23.93 billion, the decline reflecting the strengthening of the New Zealand dollar and a wind-down in borrowing to fund the "Think Big” projects. The Reserve Bank estimates that total debt by last September amounted to 55.1 per cent of GDP, down from 58.8 per cent in March, but still well up on a level of 45.7 per cent at the corresponding time in 1984. Kiwi dollar The value of the New Zealand dollar has been volatile since the currency was floated on March 2, 1985. The removal of all foreign-ex-change controls came after the Labour Government’s decision in July, 1984, to devalue the New Zealand dollar 20% against a basket of other currencies. Since the float, the kiwi dollar has appreciated against the currencies of most of this country’s large trading partners. The kiwi dollar stood at just under 45 U.S. cents immediately before the float and had since appreciated 34% when it reached 59 U.S. cents last October. The exchange rate was this week about 20% higher than in February, 1985. The Australian dollar has also strengthened against the kiwi dollar reaching its highest levels since the float recently. The exchange rate with Australia is now about 34% higher than in February, 1985. However, the Japanese Yen has depreciated against the kiwi dollar to be now around 25% lower than before the float. Turnover on the New Zealand foreign exchange market grew rapidly after the float, from $53.6 billion in March, to $98.8 billion in November. United States dollars are the largest single second currency to be traded, at 53% of the total turnover last November. Hire-purchase Buying on hire-pur-chase rose sharply over the year to March, 1985, but fell in the 12 months after that. In the year ended March, 1986, total advances made under hire-purchase agreements were $1.29 billion, 5.1 per cent lower than in the previous year.

Total advances in the latest March year were still 28 per cent higher than that in the year ended March, 1984, when they were $lOl2 million. Deficit

The Government’s fiscal deficit has fallen substantially from $2984 million in 1983-84 to $lB7l in 1985-86. In the year to March, 1984, the deficit reached'a record high at 8.7% of New Zealand’s Gross Domestic Product. In the next year, the Labour Government reduced it to 6.9%, and in 1985-86, to 4.1% of GDP.

Total Government spending as a percentage

of GDP grew steadily for five years to reach 41.7% in 1983-84. Labour reduced spending to 37.4% of GDP the next year, but in 1985-86 it edged up to 39%. The Government’s net expenditure in the latest year was 15.4% up on 1984-85. Its total revenue increased 26.1%.

The sector to record the greatest " expansion was finance, insurance, and real estate, where the number of full-time staff rose almost 10,000 and the number of working proprietors, almost 1000.

Other sectors remained relatively static, all showing increases but relatively modest ones.