Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

* Last week's Australian economic calendar was quiet, but this week the schedule expands significantly to include business investment, retail sales, private credit, and the current account. Firms most likely will estimate a 10% rise in investment spending for the year ended June 2008—if realized, this will drive spending 70% above its level of just three years ago. Retail sales probably advanced only 0.5%m/m in July (consensus 0.6%) as the negative impact of high petrol prices more than offset the boost from the latest round of personal income tax cuts. We are sticking with our call for a December RBA tightening, even though we expect the Fed to ease twice in coming months. We have, however, lowered the probability of the RBA's move from 75% to 60% to reflect increased risk that the global economy will falter.

* New Zealand's streak of weak economic data continued in July. Net permanent migration flows slowed to a trickle, which points to weaker demand for housing and easing consumption growth. Electronic card transactions (a coincident indicator of retail spending) also declined, illustrating a slowdown in consumption momentum into 3Q, following what is likely to be a 0.3%q/q contraction in consumption growth in 2Q. On the positive side, though, Fonterra, NZ's largest dairy cooperative, last Friday announced an increased payout to farmers of 87 cents to NZ$6.40 per kilogram of milk solids for the 2007/08 season. This unexpectedly large payout will boost farm income in the year ahead. This week's NBNZ business confidence survey for August will be the highlight.

* Global financial market conditions settled somewhat last week, raising hopes that the spillover effects from the severe lack of liquidity in money markets will be modest. If the financial shakeout continues in an orderly manner, focus will shift toward assessing the macroeconomic impact of a sustained widening of risk spreads in an environment of tight capacity constraints. At root, the turbulence of the past month represents a disorderly move toward repricing credit risk, which is being magnified by a loss of confidence in the ratings system for asset-backed securities. This adjustment is set to reduce the availability and increase the price of credit for both corporates and households.

* The key issue for the months ahead will be to figure out the impact of tighter credit conditions on economic growth. In making this assessment, it is easy to lose sight of the message from recent data about where the global economy stood as the financial shockwaves hit. To a large extent, the key themes of the JPMorgan outlook are playing to script; namely, that global growth remains above trend amid a significant rotation in the sources of growth.

See... AusNZ_weekly_240807.pdf

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