Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects - small upgrade to Aussie GDP growth and change to RBA call

It is even more difficult to gauge the resilience of the Aussie consumer after
the mixed bag of data this week; the retail and credit numbers told conflicting stories. The real test for the consumer will come in 2H09 when the fiscal stimulus fades against a backdrop of a rising unemployment rate, which we still believe will reach 9% in late 2010. Despite this, we pushed through modest GDP growth upgrades this week in the wake of upgrades to expected growth in our major export partners. Aussie export volumes now probably will fall less than we previously forecast.

In another change of forecast, we now believe the RBA’s easing cycle is over; the next move in the official rate will be up, but not until mid-2010. Previously, we expected two small rate cuts from later this year, mainly as a response to rising unemployment. RBA officials still may lean towards wanting to soothe the impact of job destruction, but only if the spike in joblessness is unexpectedly sudden. Similarly, we now believe modest rises in banks’ variable mortgage rates will be insufficient to trigger official rate cuts. On the flipside, RBA officials probably would welcome some air escaping from the first home buyers’ bubble, owing to higher borrowing rates. Crucially, given the unprecedented policy stimulus in place, RBA officials will not wait for the unemployment rate to peak before starting to take back the current policy accommodation. This will be an important break from historical convention.

In New Zealand, the economic data continues to improve. The upbeat reading on firms’ activity expectations in the NBNZ business survey lessened the risk that the Kiwi economy will contract in the first three quarters of this year. The main risk to the economic recovery we forecast to get under way later this year is strengthening NZD, which has added to the broader tightening in financial market conditions.

Viewed as a whole, this week’s releases are supportive of our global outlook for a broad-based recovery taking hold in the coming months. Our global manufacturing PMI index rose further in June, with the order/inventory ratio rising and the output index moving above 50 for the first time in over a year. Global consumption has also been growing into midyear. Both retail and auto sales volumes are increasing more rapidly than expected, with Japan and Western Europe providing the most significant upside surprises. With consumer demand firming and business surveys turning, the case for a rebound, led by a broad-based upturn in industrial activity, is strong.

An economic recovery is already under way in Asia, where manufacturing rebounded last quarter. After collapsing 20% in the five months through February, factory output has surged, retracing 40% of the decline. Even excluding China, the region still has already retraced a quarter of this decline. With significant further upward revisions to our 2Q09 GDP growth this week, GDP in the region now looks to have expanded 6.5% annualized last quarter, in line with the robust above-trend growth recorded in the three years prior to the recession.

ENDS

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