Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

In Australia last week, the October labour force survey showed another spike in employment, the outcome again running contrary to market expectations for a fall. The huge wave of natural resource projects getting underway means labour market conditions will strengthen in the second half of 2010, which raises the spectre of labour shortages and wage pressures emerging again. Outside the hot mining sector, though, employers first will rebuild the hours of employees whose working days were trimmed before taking on new staff; with participation rates elevated, this will contribute to a further rise in the jobless rate. Last week’s bounce in employment, the surge in home loans, and the resilience of consumer confidence reaffirmed our view that the RBA will deliver another 25bp rate hike in early December. The week ahead is quiet by comparison, but the release of the labour cost index will confirm that wage growth, for now, remains subdued. The highlight this week, though, will be the release of the minutes of the RBA’s November Board meeting, at which members lifted the cash rate another 25bp.

• In New Zealand, the soft retail sales numbers last week will be welcomed by the RBNZ. The RBNZ remains concerned that more debt-fuelled household exuberance could hamper the sustainability of the economic recovery. Household balance sheets will remain under pressure as unemployment rises and wage growth slows, but low interest rates are providing a powerful incentive to borrow. Part-time employment has risen significantly—the decline in workers’ hours has squeezed household incomes. More households have moved toward short-term borrowing, however. This is a trend the RBNZ wants to see continue for an extended period before the next tightening cycle begins, so that hikes to the OCR, when delivered, will get the most bang for their buck. Our forecast remains that the RBNZ will kick-off the next tightening cycle in July 2010 with a 50bp hike.

• One of this year’s key positive surprises has been the rebound in global consumer spending. With financial markets also lifting, this is expected to produce a gradual shift in business behaviour from retrenchment to expansion, most importantly in global labour markets. The extent of this shift in behaviour already in train may not be fully appreciated. Notwithstanding the disappointing October labour market reports in the US, conditions elsewhere are showing clear signs of improvement. The unemployment rate outside the US was stable at 7.8% in 3Q09, and early readings point to continued stability in October.

• Although the Euro area exited recession in 3Q09, the return to growth was more sluggish than anticipated. After contracting 5% between 1Q08 and 2Q09, GDP increased at a 1.5% annualized pace last quarter. The gain fell well short of our forecast, which was based on the double-digit IP increase in the region. Given the strength of manufacturing, output in construction and services was apparently very weak. The weakness in services is puzzling given the normal cyclical links between industry and parts of the service sector.

JP Weekly With Graphs (pdf)

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