Australia and NZ - Weekly Prospects 16/03/09

Australia and New Zealand - Weekly Prospects [16/03/09]

See attached file: Weekly160309.pdf

• Economic data released in Australia last week showed that the unemployment rate soared to a four-year high of 5.2% in February, despite a small rise in employment. The jobless rate has spiked from a cycle-low of 3.9% in just 12 months - we maintain that the unemployment rate will reach 9% by the end of 2010. Also, consumer confidence fell in March, albeit more marginally than expected considering the survey was conducted in the days following the RBA's decision to leave the cash rate unchanged and the first fall in GDP in eight years. This week, the minutes from the RBA's March meeting will be released Tuesday at the start of a string of speeches from RBA officials. These should provide clues on whether the RBA cuts the cash rate again on April 7, or waits until midyear. Officials have made clear they want more time to gauge the impact of monetary and fiscal stimulus already delivered. This week also should see a fall in auto sales but a small rise in dwelling starts.

• Last week, the RBNZ cut the OCR 50bp - we had expected a larger move, owing mainly to deteriorating conditions offshore. RBNZ Governor Alan Bollard signalled he is wary that a significant amount of stimulus already has been injected into the economy, and said that any future cuts to the OCR would be smaller than those recently delivered. The retail sales trend continued to decline in January and will continue to do so, with only the forthcoming tax cuts in April and lower interest rates preventing an even larger decline than currently forecast.

• The flow of downbeat global indicators on industrial activity and international trade continued last week, testimony to the pronounced weakness of global goods demand. Manufacturing is the timeliest and most comprehensive gauge of goods expenditures. We estimate that global factory output fell 3%m/m in January, similar to in November and December. Moreover, the severity of this downward momentum points to a drop in global IP of 25-30% annualized this quarter, in excess of the 22% decline recorded in 4Q08. The continued nosedive in manufacturing suggests that global GDP will fall deeply again, similar to the 6.7% decline recorded in 4Q08.

• Stresses are mounting in the emerging markets. A combination of duration and currency mismatches in external debt along with fx derivative exposures gone bad is plaguing the group. EM corporates raised some $1.3 trillion in external debt from syndicated loan and bond markets between 2006 and the third quarter of 2008. Since this borrowing had relatively short maturities - with over $200 billion coming due in 2009 - refinancing risks have increased amid the tightening in global credit markets. Banks and corporates from countries as far flung as Korea, Mexico, the UAE, and Russia are facing challenges to roll over external debt. Another angle on the same problem is the fact that households in many EM countries borrowed heavily in foreign currency, which is generating systemic risks across local and foreign banks.

ENDS

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