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Stagflation spectre in economic outlook?

Media statement Wednesday, June 14th, 2006

Stagflation spectre in economic outlook?

Rising prices and falling economic growth can result in stagflation; is that the spectre we are now facing? The question is raised by the Employers & Manufacturers Association (Northern) as Finance Minister Dr Cullen called for restraint on wage rises.

“We would be unwise to let factors driven to a large degree from overseas to add to wage pressures,” said Alasdair Thompson, EMA’s chief executive.

“We can’t simply award ourselves higher wages to compensate for high oil prices, or the lower exchange rate which is pushing up the price of imported goods.

“While inflation is marching towards four per cent per annum due to these factors, along with higher power prices and ongoing skill shortages, the rate of GDP growth has fallen and is expected to stay low for the next year.

“Growth has dropped from its 3.5 per cent per annum average and is expected to fall to just one per cent.

“Rising prices and lower growth sets the scene for stagflation - rising prices without real growth - which hurts everyone.

“The drop in the NZ dollar is a consequence of the rest of the world seeing that we have spent far more than earned. Overseas investors in effect are saying: ‘Your higher import costs and reliance on borrowing means you are poorer so we are marking down the value of your currency.’”


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