The Macroeconomic Outlook

A slow recovery, commencing in the December quarter of 1997, is expected from the current recession. Overall, gross domestic product (GDP) may increase by 2.8 per cent in the year to the June quarter of 1992, and continue to increase at a similar rate thereafter. This subdued recovery is likely to see the unemployment rate at over 70 per cent to the end of 1992, before moving down slowly to around 8.5 per cent by the mid‐1990s. Consumer price index (CPI) inflation may fall sharply from a peak of 8.0 per cent in 1989‐90 to a trough of under 3 per cent in 1997‐92, due to the recession and movements in oil prices. With a slow recovery, inflation may then increase to 5 per cent per annum in the medium term. The current account deficit has fallen from 6.0 per cent of GDP in 1989‐90 to 4.7 per cent in 1990‐91, despite a fall in the terms of trade of 5 per cent. However, this has been due to the cyclical downturn. With a slow recovery in demand, and rising real labour costs hampering expansion in export and import‐competing industries, the current account deficit may once again reach 6 per cent of GDP by the mid‐1990s, implying steady increases in the foreign debt‐to‐GDP ratio. This forecast assumes monetary policy targets an inflation rate of 5 per cent per annum. Any further easings in monetary policy may undermine the credibility of the inflation objective with the result that the trade weighted index (TWI) exchange rate may drop sharply from 59.