Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The economic data flow picks up in Australia this week, with August retail sales and credit numbers on the agenda, as well as building approvals. The retail and credit data are important milestones ahead of the October RBA Board meeting, when we expect the first rate hike in this cycle. The odds of an October hike fell slightly after the unexpectedly soft retail and employment data a couple of weeks ago, but we retain the view that if the current “emergency” cash rate setting no longer is appropriate, why retain it? This morning’s upbeat comments by the RBA Governor leave open the door for an October hike. Also this week, Treasurer Wayne Swan will provide an update of the Commonwealth Budget position. We already assume substantially better budget outcomes than the Treasurer forecast back in the Budget in May, which means Commonwealth bond issuance will be much lower than the Government’s assumptions in the May Budget.

• The recession in New Zealand has ended. Indeed, last week marked an important turning point for the Kiwi economy, with the release of the 2Q GDP report showing the economy expanded 0.1%q/q in the June quarter, after five straight quarters of contraction. This week, we expect data to confirm that the economy will continue to expand in 2H09. We expect the NBNZ business confidence survey to show further improvement in the all important firms’ own activity outlook—already at a five year high. The headline confidence figure should rise to 40, suggesting that a net 40% of respondents expect business conditions to improve in the next 12 months.

• Elsewhere, central banks are now actively talking about the timing of policy normalization. For many, this reflects the surprisingly strong growth bounce taking hold on the heels of aggressive easing earlier this year. However, a broad range of central banks are pointing to asset price inflation as a factor warranting consideration of early policy action. Notably, Fed Governor Warsh wrote last week that the level of asset prices will demand “careful assessment” and “that prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.”

• Underlying the forecast of divergent timetables for normalization to begin are two factors that distinguish the position of the G-3 economies from the rest of the world. First, although the credit crisis was global in nature, the lasting damage to financial institutions and credit availability is concentrated in the US and Europe. Despite the improvement in financial conditions, home prices remain depressed and credit is contracting. In contrast, credit is now flowing again in Emerging Asia and property prices are making new highs in some important regional markets. Second, our forecasts see inflation remaining low across in 2010. However, the G-3 stand out in the degree that utilization rates will remain depressed and place downward pressure on inflation. In the US and Euro area, core inflation is expected to break below 1% next year—record low levels in each case. In Japan, deflationary pressures are set to intensify as core consumer prices are expected to fall 1.5% in 2010.

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