Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

•In Australia, we look for the RBA to raise the cash rate 25bp today. The chances of an October hike have been building for some weeks on the back of the steady ratcheting up in hawkishness of RBA commentary, and a near uninterrupted stream of healthy economic data. In our view, it still makes sense for RBA officials to start the tightening cycle at the earliest opportunity, rather than wait for more information and risk the RBA “falling behind the curve.” RBA officials have indicated that current policy settings are at “emergency” levels, but the emergency clearly has passed. Further, moving in October avoids the difficult task of explaining a rate hike in November following the release of what should be a weak 3Q CPI print later this month. This week also brings more employment data—we expect a 20,000 fall for September—and the home loans data for August—we anticipate a small fall.

• In New Zealand, with the recession over, businesses are feeling more upbeat, with the NBNZ business survey last week rising to a decade high. The rise in confidence has positive implications for employment and investment, and reaffirmed our forecast that the economy will continue to expand in coming quarters. The RBNZ should, though, remain sidelined until mid-2010. The NBNZ last week pointed out that the last time the components of its survey surged “this far, this fast” was following the Asian crisis in the late 1990s. Back then, it said, the RBNZ watched the economy firm and resource pressures intensify for more than a year before taking action.

• A sustained upward trajectory in global growth momentum appears to have been broken in September. Our global manufacturing PMI survey stalled last month and the new orders index moved lower, following solid increases in both in each month this year. Global car sales also look to have begun a correction last month after having rocketed up 33% this year to a new record high. And the move towards stability in US labour markets was rudely interrupted by an employment report showing greater than expected September job losses, a fall in the work-week, and a rise in unemployment muted by a sharp fall in the participation rate.

• Our US forecast envisions an economy growing at a 3.5% pace through the end of 2009. While this is a forecast that is a full percentage point above consensus, it would represent a very disappointing outcome against the backdrop of damage done during this recession. As we have noted on a number of occasions, the three deepest downturns since WWII were followed by recoveries in which GDP growth was sustained at a faster than 5% pace during the first two years of recovery. The September labour report—which showed significant further job losses last month along with an 824,000 benchmark downward revision—emphasizes the cost inherent in producing a solid but not boomy growth outcome. It appears that the loss in employment during the current downturn is now approximately 8 million. At a sustained 3.5% growth rate, it would likely take until sometime in 2013 before the economy restores the jobs lost in the downturn.

Australia and New Zealand - Weekly Prospects with Graphs (pdf)

ENDS

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