Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• In Australia last week, the Federal budget was an anticlimax; the Treasurer delivered what he promised—a “beige” budget. The economic data was more revealing, with employment booming (again), but home loans cratering (again). It seems the threshold for interest rate pain has been crossed for many borrowers. The key call now is how long RBA officials wait before pulling the interest rate trigger again. We suspect the pause will be short; the next hike should come in July. One source of anxiety for the RBA is the inflationary impact of the soaring terms of trade, a point reinforced last week in a speech by the RBA’s Assistant Governor (Economic). The week ahead likely will see a 3%m/m drop in consumer confidence in May, owing to the recent rate hike and the bland budget. There also is plenty of RBA activity, with the release of minutes from the last Board meeting and a couple of speeches.

• New Zealand’s Budget this Thursday will be the highlight across the Tasman. We suspect that Budget 2010 will include measures to prevent property investors from offsetting their losses against income and other taxes. This should have the effect of further dampening housing market activity. Finance Minister Bill English already has flagged that the Budget will set out important policies to lift economic growth and give New Zealanders “incentives to get ahead.” New Zealand consumers may, in fact, have started to find their footing. Retail sales last week bounced back in March (+0.5%m/m), although there still seems an element of cautiousness among households.

• Last week delivered important constructive news on the policy front across Europe as actions were taken to stem the broadening crisis surrounding sovereign debt. Most notable was the establishment of a European Stabilization Mechanism (ESM), which represents a move by EU governments toward sharing the credit risk of countries being asked to implement large fiscal consolidations. As part of this plan, tightening packages on the periphery were increased and a commitment was made to shore up the discipline of the Growth and Stability Pact. For its part, the ECB agreed to buy sovereign debt for the purpose of stabilizing markets. Many details related to these initiatives are not yet available and there is implementation risk. However, we believe these risks are modest in an environment in which policymakers recognize the dire consequences of a failure to act.

• Over the past few weeks, we have struggled to calibrate the net effect of two huge forces at work in the Euro area: the powerful cyclical lift as exports, inventory, and capital spending bounce back from depressed levels versus the increasing contagion of sovereign stress that was prompting further fiscal tightening, driving down asset prices, and adding to bank funding pressures. For the most part, we had thought that the net effect of these crosscurrents would be to leave our forecast intact—an expansion that was moving forward but not at a particularly strong pace relative to the depth of the recession. Toward the end of last week, however, we became worried that the buildup of financial market and banking stress could escalate so much that the Euro area might be driven back into recession.

ENDS

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