Gareth Morgan, Director of Gareth Morgan Investments
The release last. week of the December quarter’s Producers Price Index con firms inflation is running at very low levels in comparison to other economies. With the falls in oil prices yet to feed through, the probable falls in nominal wage rates that intensified domestic competitive conditions have been encouraging and the Employment Contracts Bill will facilitate, the prospects for very low inflation are high. Ni’s inflation has arrived at levels that not long ago we could only eye with envy.
Despite this achievement it’s obvious to all that while price stability may be necessary for a sustained growth path, it. is by no means sufficient. The latest economic forecasts circulating the business houses at present and soon to be fed to the press, arc singularly pessimistic in the growth outlook for Ni over the next two years, with rates significantly lower than 2% and insignificantly different from zero, being projected. Coming after the last three years of poor performance, this is starting to look like entrenched stagnation.
That inflation eradication isn’t the be-all of economic vitality has increasingly been appreciated since recession set in, and economic policy has begun to show a fuller dimension than simple inflation-throttling required. But the efficacy of that dimension is contestable, There is similar intensity between the present determination to flay fiscal waste, with the last. administration’s concentration on price stability. What if, and it has to be a more than even chance, the intended public sector reforms also fail to materially improve growth performance over the present government’s term ? The reorganisations will probably produce efficiency gains in delivery of social services, but. who says this is the telling constraint on NZ’s ability to recover?
There is a disturbing tendency for economic policy to lurch from one objective to the next without policies being considered as part of a comprehensive plan, with each component assessed in terms of its contribution to growth. The fallacy’ of the single objective approach is easily appreciated when one considers why it is failing. For instance;
- Curbing inflation enhances the price competitiveness of exporters, hut that. doesn’t necessarily thrust export earnings onto a higher plane. if this were the magic formula, the US would by now be booming on the hack of export growth after all its teal exchange rate has been ‘undervalued” on a purchasing parity basis for a number of years. The limitation of this policy priority has been summarised in the ‘Porter” analysis of competitive advantage.
- Curbing fiscal deficits can’t alone be the answer, otherwise Australia wouldn’t have got itself into the poo.
The policy umbrella required to facilitate a vibrant private sector needs to force productivity, entrepreneurship, domestic savings, and innovation if foreign~ sourced income is going to rise, That government’s have been unable or unwilling to design a strategy that actually forces these conditions, gives little reason to believe that present growth rates are any lower than we deserve. A piecemeal approach will at best deliver only gradual results with political instability accompanying that transition.