Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

The RBA decision tomorrow is the obvious highlight of a busy week ahead, with a slew of economic indicators scheduled for release. The data includes inventories and company profits, private credit, retail sales, and residential building approvals. On the rate decision, the RBA will deliver another 25bp hike, the third in as many months. At the current 3.5%, the cash rate is too low for an economy that, in the words last week of the Deputy Governor, “has held up much better than had been expected”. To put it another way, the storm has passed, so the catastrophe insurance no longer is needed. Our call for a hike tomorrow was reaffirmed last week by data showing a surprise bounce in car sales and confirmation that firms had upgraded their investment intentions. Investment spending unexpectedly dropped in 3Q, but the improving investment outlook heralds a “new era of prosperity”, one that will, however, be blighted by capacity constraints and emerging skill shortages. The resulting inflation risks mean the RBA will continue tightening throughout 2010, as policy approaches a stance closer to neutral.

• It was a quiet week last week in New Zealand, the highlight being the NBNZ business survey. Business confidence dropped in November, but the outlook improved. Between now and the RBNZ’s next OCR announcement (Dec. 10), the data in New Zealand slows to a mere trickle. We expect the RBNZ will maintain its neutral policy stance in December, reiterating that the OCR will remain “at” the current level until 2H10. Housing market activity and household spending may have picked up, but business spending remains weak, private sector debt elevated, credit growth subdued, and unemployment is still rising. The RBNZ, therefore, has scope to sit on the policy sidelines for the time being, and not deliver the first hike until mid-2010.

• The recent global data flow shows solid growth in industrial activity, rising consumer spending, and a firming in household and business sentiment—developments consistent with our view that a synchronized global upturn will be sustained into 2010. There remains, however, an important unanswered question: Will firms complete the shift away from retrenchment and raise employment and capital spending next year? Our optimism on this front has been challenged by the disappointment in October readings from the US and US regional business surveys that suggest that the manufacturing ISM survey will fall this week (to 53.5). However, the broad sweep of upbeat global indicators, notably in Asia, and the encouraging news from US initial jobless claims, leave us comfortable about near-term growth trends.

• Our forecast has emphasized the importance of the positive feedback loop between financial markets, confidence, and spending in promoting growth. While the primary downside risk is adverse economic developments that might undermine this process, the events in Dubai are a reminder that there are also financial sector risks. The Dubai announcement created a shock wave and raised concerns over the exposure of international banks to Dubai. The restructuring of one of the key quasi-sovereign entities in Dubai could have major effects on the domestic banking system, resulting in a chain of rating downgrades that in turn could dampen the recovery of the UAE economy as banks rein in credit growth. The announcement also will have large ripple effects on the regional political landscape and weaken Dubai’s political weight within the UAE.

Australia and New Zealand - Weekly Prospects Nov 30 (pdf)

ENDS

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