Economy continues to brighten—bank

Press, 24 October 1989, Page 26

Economy continues to brighten—bank

PA Wellington The economy is continuing to brighten in spite of a sharp drop in consumer spending after the July GST increase, according to the National Bank’s latest economic indicators. The July leading index of economic activity, compiled by the bank’s economics division and the New York-based Centre for International Business Cycle Research, fell to 115.8 from 117.8 in June. The index growth rate dropped 4.1 per cent to 1.6 per cent. The bank publishes the index in conjunction with the coincident index, which is used to forecast the economy’s growth pattern over the next three to six months. But in its latest “Leading Indicators” release, the bank says the sharp fall should be viewed in conjunction with the unusually sharp rise over the previous three months. From April to June, house-

hold spending rose steadily in anticipation of the 2.5 per cent hike in GST. “This was a reflection of consumers bringing forward their planned future spending, on durable goods in particular, to avoid paying the extra tax,” the bank said. Given the disruption to the indices’ cyclical pattern caused by the GST increase, the drop in the July index could not be considered an indicator of future prospects. A comparison of the latest indices with those before and after the introduction of GST in 1986 meant New Zealand could “reasonably” expect the present recovery in economic activity to continue over the next few months, the bank said. “Once the disruption caused by GST dissipates, we would expect underlying economic factors to take over again, and economic activity to settle back on its pre-GST trend.” The recovery of August retail sales

backed this prediction. The July leading index was based on five of the 10, indicators generally used ■to .calculate growth. This month’s indicators were: overseas orders for plant and equipment; overseas orders for consumer goods; new building permits for dwellings; new building permits for non-dwellings; and the share price index. Of those, only the share price index recorded a rise. Building permits, together with household expenditure on durable consumer goods, were among those indicators most sensitive to changes in the rate of GST. New building permits for nondwellings fell by 40 per cent while permits issued for dwellings fell by 30 per cent. The coincident index showed a 3.2 per cent fall to a growth rate of -3.4 per cent, also due to the decline in consumer spending.