Stratospheric prices for New Zealand key exports are expected to boost the economy and the exchange rate this year, with Westpac Bank now picking annual growth of 4.2 per cent.
That's up from a prediction of 3.8 per cent made by the bank's economists in November. Growth was picking up, after the earlier kick-start from more construction and a resurgent housing market in the past couple of years. Now the sharp and sustained lift in national income from the high terms of trade will add a third leg to the growth story.
"This year is likely to feature a lighter mood (than 2013) and freer spending on the part of businesses and households," Westpac chief economist Dominick Stephens says. But a greater part of that spending would be imported so overall GDP growth would probably continue at about the same quarterly pace as seen late last year.
The bank's economic forecast also said the official cash rate was expected to rise from 2.5 per cent now, to 3.75 per cent by the end of the year.
With higher terms of trade, the dollar is also expected to stay up for longer, at above US80c and about A90c against the Australian dollar until the end of 2015.
House prices are expected to rise at a slower pace than last year, up 6.5 per cent this year, but just 1 per cent in the following year.
"There is no doubt that the housing market has passed its peak," Westpac said, with sales volumes down in the past three months and houses taking longer to sell.
Higher interest rates would be the main drag on house price growth this year.
"While we suspect the sweet spot won't last forever, strong demand from China looks set to benefit New Zealand's agricultural sector for some time year," Stephens said.
Key forecasts 2014
Economy: 4.2 per cent
Residential investment: 15.8 per cent
Government consumption: - 0.1 per cent
Employment growth: 3 per cent
Unemployment rate: 5.1 per cent, by end of Dec.
House prices: up 6.5 per cent