Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

The highlight in Australia last week undoubtedly was the 1Q GDP report. The economy skirted recession, technically at least, but mainly because of a sharp fall in import volumes The plunge in imports is a symptom of firms slashing investment; this has clear, negative implications for employment. Indeed, this week’s Labour Force report for May should show a fall in jobs and a rise in the unemployment rate, after the surprise drop in April. RBA Governor Glenn Stevens made clear last week that the Board stands ready to ease policy again if needed. On the flipside, however, he expressed anxiety that generation-low interest rates could draw in borrowers who may find it difficult to service their debt when interest rates rise. This hints that further official rate cuts, if any, will be delivered in measured steps.

After a week devoid of key data, the RBNZOCR announcement will take the floor this week. The decision will be a close call, with market forecasts spread between “no change” and a 50bp cut. Our forecast calls for a 25bp cut, although we believe the risks are skewed toward a larger move. There are four reasons we believe the RBNZ will deliver a rate cut. First, it will support the dovish commentary delivered by the Governor after the April decision. Second, it may prevent domestic banks from raising their mortgage rates, even though funding costs are elevated. Third, the RBNZ probably will make further downward revisions to its economic forecasts in the June Monetary Policy Statement, to be released this week. Fourth, recent NZD appreciation will be a key consideration given that monetary conditions have tightened.

• Two core judgments underlie our view that a foundation is being laid for a sustained phase of above-trend global growth. The first relates to behavioural shifts by households and firms away from retrenchment. Global consumers, who led last year’s downturn in response to a surge in commodity prices, tightening credit conditions, and a dramatic increase in uncertainty about the future, have been expected to shift first, even as jobs continue to be shed. Firms only began retrenching in earnest late last year and are likely to continue pulling back. Even so, the middle months of this year have been expected to deliver a moderation in the intensity of business adjustments, as final demand falls less than firms planned for and they are able to make early and significant progress reducing labour costs and inventories.

Inflation outcomes will provide the key to policy response. Although our forecast anticipates that the global economy will enter a sustained period of above-trend growth late this year, core inflation is expected to slide toward zero in the developed economies in 2010. If our inflation outlook proves correct, monetary stimulus will remain in place into 2011. Even with strong growth, disinflation will validate the threat of deflation posed by multi-decade lows in resource utilization.

Australia and NZ Weekly Prospects Full Report (pdf)

ENDS

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