Stagflation warning: where do politicians stand?

Media release October 4th, 2000

Stagflation warning: where do politicians stand?

The warning delivered by Dr Brash today to the Parliament's Finance Select Committee was extremely timely, the Employers & Manufacturers Association (Northern) says.

"By identifying the risk of stagflation, the Reserve Bank Governor, Don Brash has done New Zealand in general and business in particular a big favour," said Alasdair Thompson, EMA's chief executive.

"Back in August Dr Brash told the Finance Committee that business confidence could easily stay low with the economy remaining flat, or it might rebound quickly. The latter would see demand lift and lead to the Bank raising interest rates.

"Dr Brash now sees the reality of the third possibility, stagflation, which in effect we warned about in March and repeated in May.

"Our economy shrank in the June quarter though the price of imports has gone up and our dollar down as a result of soaring commodity prices in our trading partner countries. Alongside the oil price hike, we are seeing the effects of much higher prices from raw materials such as steel, aluminium, copper wire, and paper pulp.

"Inflation will go well over three per cent later this year and it would be stupid to try and pay ourselves higher incomes to compensate.

"We must repeat our call for politicians and business to demonstrate leadership by showing restraint on salaries and wage claims. We urge our politicians to state where they stand on this issue.

"If we go after higher pay in these circumstances, Dr Bash has no other option than to raise interest rates again, even if it sends the economy downhill.

"This would cause higher unemployment as our manufacturers and other producers tried to absorb extra costs. In the event Dr Brash would entrench the recession to hold down inflation."

Further comments: Alasdair Thompson tel 09 367 0911 (bus)
09 303 3951 (hme) 025 982 024

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