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Short solutions are not the answer to Stagflation

Canterbury Manufacturers’ Association
Media Release
20 June 2006

Short solutions are not the answer to ‘Stagflation’.

The Canterbury Manufacturers’ Association is warning that stagflation in the New Zealand economy will have serious repercussions particularly for small and medium sized enterprises committed to funding research and development programmes.

The costs to New Zealand companies have already risen sharply this year due to the increase in petrol costs, the falling dollar and the increased competition from imported goods and while some returns from export markets are improving developing those markets has a major cost. Caught between the rock of cost increases and the hard place of falling demand, business development, particularly exports, will slow or stop. The inevitable consequence is an expanding trade deficit bubble that will burst sooner or later.

The Association fears that if New Zealand is confronted with a growing current account deficit and stagflation, the Government will resort to short-term contractionary fiscal policies whereby it cuts spending, increases taxation and interest rates in an effort to reduce inflation. However, the CMA says that Government should focus on value driving policies that support exports from a solid elaborately transformed manufacturing (ETMs) sector as an alternate course of action. This would involve Government implementing a policy framework that at least encourages research and development, more investment on productive plant, and early stage investments in ETMs. Firm action on external price stability might also encourage more to risk the development of export markets.

The CMA has already spoken out on the wisdom, or lack of it, of large wage increases and the potential for tax payers to be underwriting risk in SOEs competing with private investors.

According to Chief Executive John Walley, “Government policy should be focusing on supporting behaviours that will encourage value added exports. Without better balanced trade we must look to the rest of the world to fund our excess consumption and that is not a sustainable position as sooner or later our credit will run out. At that point expect some real pain.”

ENDS

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