Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

A quiet week in Australia this week means that market pundits will be taking direction from offshore. The timing of the RBA’s next rate move undoubtedly will be under consideration. Indeed, the domestic data since the last Board meeting has slightly lowered the likelihood of an October tightening, but probably failed to surprise RBA officials who, like us, expect the consumer-related data to be sluggish throughout 2H09 as the impact of the fiscal stimulus fades. We believe the softening in the data is insufficient to delay the first rate hike, especially given that policy settings currently are at “emergency” levels. We still look for a 25bp rate hike in October, provided the transition to weaker data is orderly, as it has been so far.

• In New Zealand, a positive 2Q GDP print is expected this week, confirming that the economy expanded in the June quarter for the first time since the end of 2007, marking the end of a prolonged recession. We recently revised higher our forecast for 2Q GDP to +0.3%q/q (from -0.1%), following stronger than expected retail sales and export volumes data. Though investment and inventories are expected to be a drag on economic growth in the June quarter, private consumption looks to have made a small, positive contribution, and net exports look to have added significantly to GDP growth.

• Amid clear evidence that a synchronized global economic recovery is taking hold, there is still significant concern that the recovery will be scuttled by the ongoing adjustment in US household balance sheets. From a starting point of low saving and high leverage, the US household sector was roiled last year by a collapse in wealth and a dramatic tightening in credit availability. The subsequent consumer retrenchment that drove the economy into a deep recession may have ended—a point reinforced by the broad-based firming in consumer spending indicators around midyear. Last week’s 2Q09 US Flow of Funds data makes it clear that balance sheet adjustments remain in the early stages with leverage ratios well above their historical trend and net worth still depressed. However, it is important to recognize that substantial cash-flow adjustments have already been made that will lead to a marked improvement in household balance sheets over the coming quarters.

• With the economy and financial market conditions gradually normalizing, many central bankers are contemplating exit strategies. While the main focus will be on the outlook for economic growth and inflation, asset prices also will play a role in many cases. An important channel for the transmission of policy is through the reflation of depressed asset prices via excess liquidity, thereby improving household, corporate, and bank balance sheets and reinforcing the upturn in the economy. This process is now playing out across the globe, aided by unconventional policy measures (i.e., credit easing) in some countries. An important distinction must be made between the level and growth of asset prices, however. In countries where wealth is still deeply depressed, this is acting as a restraint on the economy, notwithstanding recent gains in asset prices. This is doubly true when domestic financial institutions are impaired.

Australia and New Zealand - Weekly Prospects (pdf)

ENDS

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