Australia and NZ - Weekly Prospects 5/1/09

Australia and New Zealand - Weekly Prospects

• The economic data flow has been meagre in Australia in recent weeks,
but the RBA’s credit aggregates last week provided something for market
pundits to chew on. Demand for credit continued to moderate as expected.
While lower interest rates should help provide a floor under demand for
credit, the massive wealth destruction occurring in the highly leveraged
household sector has encouraged many to pay down debt and/or boost
precautionary savings; this will weigh on demand for credit. Retail sales,
building approvals and trade data this week should confirm that domestic
activity eased further in November. Retail sales, in particular, probably
fell, although anecdotal evidence from retailers indicates that sales
rebounded in December.

• In New Zealand, 3Q GDP data showed that the economy contracted for
the third straight quarter. The current recession should be shallow,
however, owing to significant personal income tax relief in the pipeline
and the government’s recent decision to accelerate infrastructure
spending. But, with firms’ own expectations collapsing even further in
December, GDP growth will continue to fall in coming quarters. Our
forecast calls for the economy to contract 0.5%q/q in 4Q08 and 0.2% in
1Q09.

• As we turn into the new year, the message from the data flow is as
straightforward as it is glum. We are in the midst of a deep global
economic contraction, one that is likely to produce the sharpest
four-quarter decline in global GDP in the post-World War II era. To an
important degree, the depth of this downturn reflects its broad reach.
Fourth-quarter 2008 GDP is tracking a substantial pace of decline in each
of the G-3 economies, with the average of the group down at an estimated
5% pace. GDP also likely contracted in Latin America, Emerging Europe, and
Emerging Asia last quarter.

• While the EM economies are declining more modestly at present, they
are key producers of manufactured goods and commodities and have not yet
felt the full impact of the synchronized downturn in global industry.
Indeed, the JPMorgan global manufacturing PMI survey, which has proved a
valuable cyclical guide, sank to a record low reading of 33.2 in December,
a level consistent with a greater than 15% pace of decline in global
manufacturing output. With the orders and inventory ratio falling further
last month, an intense contraction phase in industry should remain in
place for some months to come.

• A key theme of our 2009-10 outlook is that it will likely prove
easier to exit recession than to restore economic health. Indeed, the
depth of the current economic downturn and the damage done to financial
markets suggest that the early stages of the next recovery phase will
carry the weight of significant lingering problems. The US looks set to
face the unpleasant arithmetic of high unemployment, very low inflation,
and a large structural budget deficit. The risk that this dynamic pushes
inflation expectations uncomfortably low is significant.

Weekly.pdf

© Scoop Media