Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• After a quiet week for economic data in Australia last week, the data-flow picks up this week with February credit, retail sales, building approvals, and trade figures. It will be interesting, in particular, to gauge consumer behaviour in February ahead of the RBA meeting next week. There also are two potentially influential speeches to be delivered by RBA officials. The March Board minutes showed that the RBA’s rate decision earlier this month, when the RBA kept its powder dry, was a closer call than it appeared at the time. That, and deteriorating conditions offshore, mean we now believe the RBA will cut the cash rate 50bp on 7 April, compared to our previous “no change” call. With signs on improvement in financial markets and housing, though, the April decision also is likely to be a very close call. Last week, we lowered our forecast for the terminal cash rate 25bp to 2.5% on the assumption that the RBA also will cut the cash rate in May.

• The New Zealand economy shrank 0.9%q/q in the final three months of 2008, marking the fourth straight quarterly decline. This probably will be the deepest quarterly contraction in this prolonged recession that, in our view, will extend for at least another two quarters. Surprisingly, private consumption was flat—falling petrol prices and lower interest rates appeared to prevent the contraction we had forecast. Widespread recession fears and the wealth destruction underway in the household sector mean, though, that household spending, which accounts for nearly two thirds of the economy, will remain depressed in 2009. The main event this week is tomorrow’s business confidence result.

• A consequence of global economic downturns is a buildup in slack. However, the degree to which resource utilization rates are falling in the midst of a severe and synchronized global recession is startling. Labour market adjustments are now in full swing and global industrial production has already fallen about 18% from its peak level. Even though we anticipate a return to growth later this year, GDP gains are expected to remain subpar through early 2010. As a result, our measure of global resource utilization—gauged by the unemployment rate and manufacturing capacity utilization—is on track to fall to levels not seen in at least 40 years.

• As we monitor the incoming data flow, global GDP appears to be contracting this quarter at a pace only slightly more moderate than the historic 7% annualized decline in 4Q08. However, a number of business surveys are turning at quarter end, consistent with our view that a significant moderation in the pace of economic decline is in the offing. In aligning business surveys to growth, it is important to recognize that these surveys are diffusion indexes measuring the breadth of a downturn, not its intensity. It is thus no surprise that surveys failed to fully register the magnitude of last quarter’s GDP decline. This does not minimize the usefulness of these data, but suggests that even small increases can be associated with large movements in activity.

Click Here For The Full Report

ENDS

© Scoop Media