AGAINST the background of the cabin crew strike at Cathay Pacific Airways, out-going Secretary for Monetary Affairs David Nendick warned yesterday that in a competitive and inflationary environment, spiralling wages would force employers to take harsh measures. In a wide-ranging discussion on the state of the local economy, Mr Nendick, who is scheduled to retire at the end of the month, said market forces would decide the outcome of labour disputes. ''Obviously, if labour is too expensive the end result is that the services that are provided by the employers of labour become uncompetitive. ''Clearly, there's a trade-off between jobs and pay, and if people insist on being paid too much - and I'm not being specific about the Cathay Pacific situation - then there will be fewer people who will be employed.'' With a persistent annual inflation rate of nearly 10 per cent and unemployment down to less than two per cent, local employers have had to shoulder hefty annual wage increases to retain staff. The Cathay dispute is seen as a harbinger of the end of a business environment which has thus far enjoyed a relatively compliant workforce. At the end of the day, Mr Nendick said, the marketplace would determine what could be paid in wages and salaries. ''What we don't want is to arrive at that situation suddenly with the collapse of major employers because they simply aren't able to be competitive with the services they offer. Therefore, naturally, at a time when wages are increasing rapidly, employersare going to do what they can to contain costs. ''Whether that will lead to labour disputes is something that I'm not in a position to predict,'' he said. As for inflation - the leading culprit in the fight to contain escalating wages - Mr Nendick asserted that the cure would be worse than the complaint. ''Inflation is the penalty for our success,'' he said, adding that the main contributing pressures were demand for land and labour, whose scarcity the government was cautiously addressing. Inflation notwithstanding, 1992 was a good year for the economy and barring unforeseen shocks, the prospects for 1993 and beyond remained bright. To date, the protracted row between Britain and China over political reform in the territory had not affected the local economy. ''So far, it does look as if people are still behaving in the same way they were in the middle of last year,'' Mr Nendick said. The local stock market was among the world's best performing for the second year running, with prices up some 37 per cent from a year ago, just eight per cent under the previous year's peak. The property market remained solid following a healthy consolidation over the past six months. Mr Nendick said continued caution regarding mortgage financing in the residential property market was required, as a rise in interest rates could catch highly leveraged home buyers in a vulnerable position. Interest rates were at a low level and incipient recovery in the US was likely to tilt them higher. ''I can fairly confidently predict that some time in the next year or so we will probably find an interest rate environment which is higher than it is now,'' he said.