Australia and NZ - Weekly Prospects 12/01/09

Australia and New Zealand - Weekly Prospects

• The economic data flow picked up in Australia last week and confirmed that domestic activity weakened further in late 2008. In November, the trend in retail sales moderated, the trade surplus narrowed significantly, and building approvals slumped. The highlight this week will be the December employment report. Leading indicators of employment, such as the ANZ job advertisements series and the employment component of the NAB survey, recently have collapsed, indicating that labour market conditions are finally starting to loosen. We expect another massive contraction in employment (-20,000) in December and another rise in the unemployment rate (to 4.5%).

• In New Zealand, ahead of a quiet week on the economic front, trade data last week showed a sharp narrowing of the trade deficit. The global downturn and falling commodity prices weighed on exports, and imports plunged, reflecting the significant slowdown in domestic demand. In our forecasts, net exports will remain a drag on economic growth in 2009; we call for GDP growth of just 0.2% this year.

• In the midst of a deep and synchronized global economic downturn, two elements in the recent data flow stand out. First, the US labour market is shedding jobs at an alarming rate. Private-sector employment fell at a 5.5% annual pace during the last three months of 2008, a pace last exceeded during an earlier credit crunch in the spring of 1980. The sharp slide in US employment contrasts markedly with labour-market performance elsewhere, where there is little evidence of significant cutbacks to date. Although the relative weakness of the US labour market is striking, the relative weakness in Asian industry also stands out. Asian industrial production is estimated to have declined at a 32% pace last quarter, roughly double the rate of decline in the Americas and Europe.

• Global inflation is plunging in response to the deep economic downturn and the associated collapse in commodity prices. Last week's reports registered sharp declines in December inflation across a range of countries in Europe and Asia. This week US CPI is expected to post a -0.3%oya reading—the first negative oya reading since 1955. Globally, inflation is expected to have eased to about 2%oya last month, down from a peak of 5.2% last July. We look for a decline toward zero by midyear.

• This week, it's the ECB's turn and we expect it to ease 50bp, bringing policy rates down to 2%. Activity data have continued to come in on the weak side in the Euro area, making it clear that the economy contracted more in the final quarter of last year than we were previously assuming. Instead of the 3.5% annualized drop in GDP that we were anticipating, we now think that the Euro area economy contracted 4% annualized, with a particularly sharp 5% decline in Germany. Meanwhile, inflation is now below the ECB's definition of price stability, with a decisive move down to 1.6% in December.

Weekly120109.pdf

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