JP Morgan Weekly Prospects

JP Morgan Weekly Prospects

• Australia’s economic data flow resumes in earnest this week, with reports on retail sales, credit, home building and sales, and trade. The May retail and credit reports, in particular, will be important measures of the strength of the household sector’s collective pulse. Credit probably was flat in May, held back by falling business borrowing, and retail sales probably rose only modestly, despite another avalanche of cash payments from the government. Australia unexpectedly avoided technical recession in 1Q only after significant fiscal intervention and a collapse in imports. The onus now is on consumers to prove their health without the financial “life-support” of government handouts and assertive official interest rates cuts. Rising joblessness will be the strongest headwind

• New Zealand’s economy contracted for the fifth straight quarter in 1Q, despite a strong positive contribution from net exports. Private consumption fell markedly, as did business investment. Other data last week showed the current account deficit narrowed in 1Q, but remains burdensome at a mammoth 8.5% of GDP. Sustained deficits of this magnitude will complicate policy deliberations for the RBNZ; we maintain our forecast for a terminal OCR of 2.25% to be reached in 3Q09.

•The global economic downturn was particularly damaging to the manufacturing sector, which suffered a greater than 15% decline in output in the year ended in March. As documented in these pages, conditions have steadily improved since then. Indeed, the rapid rise in the J.P. Morgan global PMI survey and the rebound already under way in Asian output suggests that a synchronized recovery in global activity is now taking hold. We expect this recovery to take off with a bang. Global industry is projected to retrace roughly one-third of its recession losses by the end of the year, a development that would produce roughly 8% annualized growth during 2H09, rivaling the fastest pace of global output gains during the past two decades.

•As a recovery in the economy and financial markets takes hold, central banks are becoming more confident that they have put sufficient policy support in place, whether in terms of unconventional credit easing, liquidity measures, or old-fashioned rate cuts. That said, the scope of these measures is massive and policymakers are in no rush to withdraw support. Last week Fed officials maintained a steady-as-she-goes approach on its asset purchases, declining to alter either the size, composition, or timing of its plans. The Fed did scale back some of its less-used liquidity facilities, whose usage has fallen from a peak of $1.5 trillion to under $700bn as confidence has recovered. The amount of Fed assistance remains massive, however, and most facilities were extended to early next year to maintain maximum flexibility in the event of a setback in markets.

Full JP Release on Weekly Prospects (PDF)

ENDS

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