RBNZ grounded amid rising tide of inflation

RBNZ grounded amid rising tide of inflation

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* New Zealand's GDP growth to slow in 2008 owing to cooling housing activity and weaker household spending

* Inflation, though, will stay near the top of the RBNZ's 1-3% target range

* RBNZ to remain on hold as it balances elevated inflation against weakness offshore

New Zealand will enjoy a welcome rotation in the sources of economic growth this year away from domestic demand towards exports. Export volumes are likely to drive GDP growth in coming quarters as global demand expands and surging food prices stimulate supply. In particular, the dairy industry, New Zealand's largest export sector, is experiencing a massive windfall of income thanks to milk solid prices more than doubling in the past year. Household spending probably will be weaker, partly because house price inflation and construction activity have turned south. The rotation away from households as the main driver of growth, though, will be cushioned by the government's expansionary fiscal policy ahead of this year's election.

New Zealand's experience in 2008 also hinges on the performance of the corporate sector. Business conditions are likely to remain robust on the surface, but there will be patches of weakness. The agricultural sector and nonresidential construction, for example, are likely to outperform other areas of the economy on the back of rising farm incomes and increased public investment. Firms in residential construction and retailing will struggle in relative terms owing to record high interest rates, surging oil prices, reduced immigration flows, and weaker housing activity.

ENDS

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