Economy on a tightrope

Press, 25 January 1986, Page 22

Economy on a tightrope

by

ADRIAN BROKKING

Economic activity in the three months ended September fell below that of the June quarter, but the decline was very moderate — in line with the “soft landing” scenario. The’September 1985 level is still higher than that of a year earlier. Although the figures are not yet available, activity is certain to have declined further in the December quarter, and may be expected to fall again in the three months to March 31, whereafter it should stabilise and slowly grow in the last half of the 1986 calendar year, by say about one per cent. Gross domestic product (GDP) would then be back at roughly the level of the beginning of last year. Retailers are becoming increasingly pessimistic, no doubt reflecting the relatively poor level of sales in the last months of the year. According to a survey in December by the National Bank and published in the bank’s January “Business Outlook” the deterioration in retailers’ expectations is accompanied by an increase in the survey respondents to reduce stocks, thus once again demonstrating

that in any business cycle retail sales are the leading edge. Retailers are not leaving things to chance either — 63 per cent of respondents will reduce orders placed with suppliers. Although retailers are quite pessimistic, perhaps manufacturers are taking a less jaundiced view of 1986 than they did before, partly because of less pessimism about export sales. This in turn is the result of the easier New Zealand dollar. However, manufac-. turers’ increasing confidence aside, a number of economic indicators continue to deteriorate. Manufacturers’ order books are becoming slimmer, and new orders coming in are not matching deliveries. Rather than build up stocks manufacturers will be trimming production, and there is likely to be a reduction in physical investment this year. This is likely to increase unemployment, and concern in this regard is certainly intensified by the high wage round. In the private sector the. high wage round may add to unemployment, and in

the public sector it will add to the Government's deficit. There appears to be general consensus that the current official forecast of a domestic deficit of $l6OO million is too low, and that a figure of $2OOO million is far more likely. If true, this would mean that the Government is not selling sufficient stock to completely fund the deficit. That this may be so is indicated by the decline in interest rates — at least for the few months of the latest stock tender — in turn leading to a decline in the value of the New Zealand dollar. This may lead to monetary expansion, which would mean a higher rate of inflation. This is unacceptable to the Government, hence the stepping up of the stock tender programme. But the likely result of more Government borrowing will be higher interest rates, a stronger dollar, while inflation will only diminish to the extent that the funds are supplied domestically. It is really a case of sailing between Scylla and Charybdis, or of the devil and the deep blue sea.