Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• The week ahead in Australia will settle once and for all the debate about whether the RBA hikes in April, or whether they wait until May, our preferred option. It would take material upside surprises on this week’s retail sales, credit and building approvals data (the last major releases ahead of the April Board meeting) to trigger a back-to-back hike. Last week’s speech by Phil Lowe, the RBA’s head of economics, while endorsing an upbeat view on Australia’s real economy, reinforced the official line that core inflation will continue to drift lower. But, while this implied the RBA is in no rush to pull the interest rate trigger again, in a television interview this morning RBA Governor Glenn Stevens offered a slightly more hawkish tone. The Governor flagged Australia’s booming housing market as a key concern and warned against speculating on rising house prices. The RBA Governor will appear in televised segments on March 30 and March 31, which will be examined for further clues on the timing of the next rate move.

• The GDP numbers released in New Zealand last week, which showed the economy grew a solid 0.8%q/q in 4Q, will have few implications for the near-term monetary policy outlook. The 1Q GDP numbers may, however. RBNZ Governor Alan Bollard appears to want hard evidence that the recovery underway is sustainable so will likely sit on the policy sidelines until after the late-June release of the 1Q GDP numbers. That said, Deputy Governor Grant Spencer last week suggested that the RBNZ will move in little steps when the tightening cycle begins. His comments were in contrast to those delivered by Governor Bollard earlier this year suggesting that the RBNZ would deliver ‘meaty chunks’ on the upside when referring to forthcoming rate moves. We, therefore, maintain our call for a 50bp hike in July given the significant amount of monetary policy stimulus that needs to be withdrawn.

• We believe that the global economy is making an important transition to self-sustaining growth as the first quarter comes to an end. As part of this shift, GDP growth is reaccelerating following a modest downshift at the turn of the year. However, it is the significant broadening in G-3 demand, rather than the pickup in top-line growth, that will be the key marker for this transition.

• It is important to recognize that a shift to synchronized domestic demand growth in the G-3 would combine with an already well-established expansion in emerging economies. Thus, confirmation that this foundation is being put in place would shift the risks to our already-strong global growth forecast to the upside. One important marker will be the employment index of our all-industry PMI. A move above 50, which could register in the upcoming March survey, would confirm that labour markets have shifted to expansion mode.

• Recent experience has underscored that financial market conditions are a critical determinant of economic growth. With this in mind, market developments in the year to date have been encouraging. Global growth has downshifted this quarter after a very strong performance in late 2009, partly due to the effects of unusually severe winter weather across much of the northern hemisphere. In addition, recent months were characterized by an unusual degree of political and policymaking uncertainty, including the controversy surrounding healthcare and financial-sector reform in the United States, the sovereign debt turmoil in Europe, and the advent of policy tightening in China.

ENDS

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