N.Z. market dive ‘not all bad news’

Press, 1 December 1987, Page 51

N.Z. market dive ‘not all bad news’

NZPA Wellington The sharemarket crash is not all bad news for New Zealand’s economy, according to Barclays Bank New Zealand. One positive impact of the crash will be genuine single digit inflation this year for the first time in a decade, said the bank’s economist, Mr Allan Yeo, yesterday. Lower inflation would mean lower 90-day bank bill rates down to 15 per cent by March 1988 and Government stock rates of between 13 per cent and 14 per cent by the end of next year. It would also mean a kiwi dollar as low as US55c and Aust79c by the end of next year. A drop in speculative demand would reduce pressure on houses, whiteware, and leisure goods and move the Consumer Price Index (CPI) back in line with the food price index. The December quarter CPI was likely to be between 1.8 per cent and 2.2 per cent, which would give an annual rate between 9.3 per cent and 9.8 per cent. With the prospect of further reduction in tariffs on imported goods inflation should fall even further next year. The Government was unlikely to achieve its budgeted surplus as the sale of shares in Air New Zealand and DFC New

Zealand in the current climate “will not serve the taxpayers’ interest.” If the Government’s budget remained in deficit there would be a short term impact on the money markets as the Government sold more Government stock to bridge the gap. But the sharemarket crash would actually make it easier for the Government to achieve its economic goals and ease the increasing tension between the “haves” and “have nots” in New Zealand society. “The closing of this gap should also soften some of the more radical demands from the Left-wing in the Labour party,” he said. New Zealand was unlikely to earn enough from the service industries in the short term to repay its huge overseas debt. For full economic recovery to take place in New Zealand there had to be real investment in the traditional mix of agricultural and manufacturing exports. No significant net investment had been made in these sectors in the last three years. With the lower interest rates leading to a lower more stable exchange rate, the prospects for the export sector were encouraging for those cost efficient producers who could see through the dif-

ficult period of the reduction in protection. Because of its small size, New Zealand would always be influenced by speculative activities and the volatility of exchange rates. High interest rates had been caused by speculative demand overwhelming real demand. “So the bursting of the speculative bubble will make it easier, not harder, for the Government to achieve its economic goals,” he said. There were two trends to look out for in the next year in the foreign exchange markets, he said. First, the Eurokiwi and Yankee-kiwi bond issues made after the 1984 election would be maturing. If interest rates did fall over the next year as expected, then it might be difficult for these issues to be refinanced. “If a significant number of investore detide the interest rate differential is no longer sufficiently attractive, this could put significant downward pressure on the N.Z./U.S. exchange rate.” The second trend involved the N.Z./Australian exchange rate. New Zealand’s inflation was now only marginally above the Australian rate and once the interest rate differential moved down to only 1 per cent or 2 per cent, the New Zealand dollar should decline against the Australian dollar.