Economy still looks sick despite healthy figures for inflation

Press, 23 January 1988, Page 22

Economy still looks sick despite healthy figures for inflation

TINA, the acronym for the. Government’s radical economic policies — There Is No Alternative — came of age last Monday. For the first time in 14 years, apart from the years of price and wage controls, inflation for a calendar year was in single figures in 1987. But TINA was not without cost. The mix of tight monetary policy and market-rules philosophy so firmly adhered to by the Lange Government has left a trail of devastated lives in its wake. Yet last Monday the Minister of Finance, Mr Douglas, had the long-sought result in his hands — single digit inflation. He greeted the .9.6 per cent figure as great New Year news for everyone. Infact, TINA had been replaced at some stage of the Lange Government’s first term, redefined into the even more singular approach known as TINO — There Is No-other Objective. All else was secondary to achieving the sort of result declared in last Monday’s consumers price index announcement.

achieved, although we are still far from the low 1 per cent to 4 per cent inflation rates of our major trading partners. The cancer victim is on the way to recovery, it seems, and all fingers are crossed. Full remission, however, seems a long way off. Last week, the National Bank s latest “Business Outlook” reported widely held pessimism among business people for 1988. Mr Douglas said that gloom was “hardly surprising” as the world stockmarket crash had altered every nation’s outlook for economic growth. He also stated that New Zealand had experienced continued economic growth so far, in spite of the difficulties of adjustment. But the latest issue of the New Zealand Institute of Economic Research’s Quarterly Prediction suggests that growth is already declining. Its December issue said that gross domestic product, G.D.P., will fall 1 per cent this financial year in New Zealand, and rise only 0.5 per cent next financial year. This compares with its forecasts for our major

The cancer of inflation, which had eaten into New Zealand’s wealth and productivity for a decade and a half, had to be irradiated into single figures. That, for 1987 at least, has been

Brendon Burns, of our political staff, looks at the latest economic indicators

trading partners who all have positive growth rate this year of 1.5 per cent to 3 per cent. Some downturn is forecast next year but growth rates overseas will still be much higher than New Zealand’s, although the international decline is said to mean less favourable export markets. The N.Z.I.E.R. survey was calculated to include the impact of the international stockmarket crash. This hit every nation, but as commentators are now noting, the value of the New Zealand market was reduced more than any other on the globe. Earlier, Mr Douglas had basked in the glow of laudatoiy comment from the likes of Sir Francis Renouf, whose company won the wooden spoon award for the worst stockmarket performance in the world, as judged by the “Wall Street Journal.” Now, the end to the boom in commercial development in the main centres, and a likely decline in the financial services sector, will have an impact across the country.

Less timber will be required from Kawerau, carpet yarn requirements will decline, as will demand for cement from Golden Bay. This will add to unemployment which the Government, even before the October crash, was predicting would continue to rise. What is more worrying is a growing belief that New Zealand will always have a sizeable pool of unemployed, say 5 to 6 per cent, as part of the price of economic restructuring. Will the provincial cities of the upper North Island become the New Zealand equivalents of northern England, where life on the dole is a way of life for huge percentages of the population? That has happened in an economy where inflation has been brought down to a third of our much acclaimed 1987 result. The N.Z.I.E.R. forecast is that even by 1990 New Zealand will still have 5.5 per cent inflation. By next December, it predicts an annual rate of 7.5 per cent. It makes no forecast on mortgage rates by that time, but bankers suggest that people will be pay-

ing around 15 per cent by the end of the year. That would certainly ease the pain on home owners and more importantly those in business, particularly exporters. But the major concern of those selling to foreign markets is the exchange rate and there is clearly a view within the Government that this should not fall rapidly. That would serve to push up import prices and thus inflation. As the dollar rides along at the level of 65 to 66 United States cents, it also makes our overseas debt repayments more manageable. The announcement of plans in December to' reduce public debt by a third through asset sales should bring some results by the end of the year. In the interim, the Government hopes that the inflationary cycle will continue to spiral downwards, dampening prices and wages in its path, if not the exchange rate. The plan always was that it would be a tough year, but the results such as lower inflation would start becoming apparent. The international stockmarket crash will just make it that much tougher and add to the casualty list. New Zealanders, however, were decisive in last August’s election that there was no other alternative.