Business New Zealand has released its latest survey of the performance of manufacturing, the PMI, and it makes very encouraging reading indeed. All five components of this overall index continue to show expansion, now for the fourth consecutive month. New orders lead the way with its highest value since October 2006. This was closely followed by strong production. The employment component had its highest value since November 2003. Results for the various manufacturing industries were positive throughout November, with some sectors showing significant activity. The petroleum, coal, and chemical product sector had yet another strong month. The food and beverage sector recorded its highest level of expansion since November 2002. All regions of the country shared in this expansion. Although it was reported that the exchange rate continues to be the main bug-bear of manufacturers, they are clearly learning to live with this, and are adjusting themselves to accommodate it. We are lucky to have a relatively large and booming economy next door with an even stronger exchange rate than us.

The big story this year has been the rise and rise of mortgage rates. We started the year with two year fixed mortgage rates at 8.1 percent and finished the year at 9.3%. Most of this rise happened in the first half of the year, before the international credit crunch started to bite in August. We in New Zealand have been fortunate that our banks have not been caught up in that crisis, and credit has still been freely available here. Risk premiums have risen, but in the international flight to safety, benchmark rates have fallen by almost as much as those risk premiums have risen. That has meant only modest rises since August to mortgage rates. We are very vulnerable to the risks of the credit crunch, however. If those benchmark rates stop falling, all the rises in the risk premium will flow straight to our mortgage rates. Lets hope that does not happen in 2008, although you would have to say the chances are quite high.

The big term deposit story this year has undoubtedly been the string of finance company collapses. The three in 2006 have been followed by another nine this year. Confidence in the finance company sector is a rock-bottom lows. And given some of the stories being reported by receivers, when they have gotten in and opened the books to full scrutiny, a number of 'worst fears' have been realised. It is hard to see a full recovery in 2008, and certainly it will be years before confidence in the sector returns. But there is much more to the term deposit market than the finance companies. Perhaps an even bigger story for 2008 has been the stunning rise in real, after-inflation returns for term deposits. We started the year with a one-year bank TD yielding 7.3 percent when inflation was 2.6 percent, giving a