Gareth Morgan, Director of Gareth Morgan Investments
As we get nearer the election National’s support of disinflation is melting, and with it the credibility of their promised growth goals.
The claim that through the policy plans they have released, economic growth of around 3% per annum will be attained was always marginal, indeed fairy stories would find this competition difficult. During the 1960s economic growth averaged around 3% pa; over the 1970s it averaged just over 2%, and over the 1950s, 1.5%. Right now this economy is struggling to even get 1% pa growth, and its sad that there remain New Zealanders naive enough to believe that National’s policy promises will return us to 1960s type growth rates.
It now becoming evident that National’s Ruth Richardson is endeavouring to find ways to lower the nominal exchange rate in an effort to appease the primal cries from fellow National candidates for this option as the traditional fillip to the economy. If the weak currency/weak exporter interests had been listened to consistently over the last 30 years the NZ dollar would now be down to the value of the peso. As it is their advice has been taken fitfully, with the result that the dollar has fallen by 52% over that time a sure sign of policy ineptitude. That Richardson should be duped by the “free lunch” of a weaker currency, apparent in the option of money base targeting as a method of controlling inflation, bodes ill for the prospects of National maintaining any credible disinflationary line for very long. Money base targeting is well known for its pitfalls which is why all major central banks dropped it 10 years ago as a useful monetary policy approach.
If the government is going to have credibility over lowering inflation then it has to have interest rates high enough for people to believe inflation will fall. That automatically means an exchange rate that exudes that confidence. Where Labour and the Reserve Bank have become unstuck, is in the gradual way they have attacked inflation. A more aggressive stance would have meant that inflation would by now be down to desirable levels, the cruel real interest rates that accompany the disinflationary process would by now have fallen, and NZ would be genuinely into a recovery phase. True, the economy may well have reached lower levels of activity than it has, but if the disinflationary programme is going to be adhered to then the recession is by no means over anyway. Prolonging the period over which they have maintained the high real interest rate structure, has simply undermined the whole adherence to low inflation, and unnecessarily weakened business balance sheets.
With National candidates already at odds with Richardson over the inflation goal, it must be apparent to most that National will stand for high inflation as it has in the past. Was Muldoon really that bad, they ponder.
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