Gloomy forecast from Westpac

Press, 27 November 1986, Page 23

Gloomy forecast from Westpac

By

MARTIN FREETH

in Wellington

New Zealand’s economic recovery will be slowed by inflation, interest rates, and labour costs that are persistently high by world standards, according to Westpac bank economists. They predict the economy will not start to pick up for another three to six months, producing less than 1 per cent growth in total production in 1987. In the face of generally poor growth in international markets, the economists point to the growing importance of

New Zealand’s international cost competitiveness in promoting the export growth needed to recover.

New Zealand is expected to experience only static demand for its exports next year as the world economy expands only 3 per cent. According to the Westpac forecast, the prospects for export growth hinge mainly on the performance of manufacturers for whom the ‘‘cost environment” is unlikely to improve much next year. Inflation, while still bas-

ically on the way down, is predicted to be 17 per cent next March under the full impact of goods and services tax. Westpac foresees a decline thereafter to 6 per cent by March, 1988.

Interest rates are also expected to decline but at a slow rate. Westpac suggests no further falls can be expected for the next three months because of the Reserve Bank’s recent tightening of liquidity management and general uncertainty about the impact of Government policies. The bank’s economists

note the current wage round is likely to produce settlements of between 7 and 9 per cent, well below those of a year ago but still higher than the labour cost increases in competitor countries. A depreciation of the New Zealand dollar could also help the competitiveness of exporters, but Westpac says the currencies of the United States and Australia are also expected to weaken.

That will negate much of the advantage to New Zealand producers because almost half their markets are in those two

countries. The New Zealand dollar should devalue as key economic variables continue to perform poorly. Westpac agrees with other commentators that the balance-of-payments deficit will probably stay up, above $2 billion even next March, reflecting the high level of imports before GST and rising debtservicing costs as the dollar has depreciated in recent months.

On unemployment, too, the economists are in agreement. Unemployment is expected to peak above 80,000 by next March.