Forecast: Good year for domestic sector

By TONY ALEXANDER*

The contrast between the export and domestic sectors becomes even greater next year.

In theory the expectation of trading partner growth, accelerating to 3 per cent, should boost exports.

But in practice growth could be about the same as this year, and margins could be squeezed as the currency consolidates between 50-55USc and currency hedging near 42USc runs out.

Patchy export growth will slow domestic growth, but momentum of the housing sector should ensure domestic activity underpins economic growth at near 2.5 per cent for the year.

Below-average mortgage rates, strong population growth, investor preference over equities and a tight labour market will underpin housing. Along with the retailing industry, it will see good activity levels, but with growth rates down from this year.

We see little scope for the labour shortage to ease, so wages pressure will add interest to monetary policy considerations.

The rising currency and wobbly world growth outlook will stay the Reserve Bank's hand. Each extra cent rise in the New Zealand dollar will increase the chances of a small easing mid-year.

* Chief economist, Bank of New Zealand

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