(See attached file: AusNZ_weekly_14Apr08.pdf)
* Last week's Australian economic data had a weak tone, with the pace of employment growth easing, residential building
approvals flat, and both business and consumer confidence sliding. This strengthens the recent evidence that growth in
domestic demand has peaked. Similarly, this week is likely to see more modest growth in the number of home loans in
February, partly owing to the RBA's rate hike early in the month. This week also sees further RBA action, with the April
Board meeting minutes released on Tuesday, just before Governor Glenn Stevens speaks in Canberra. The minutes should not
contain any surprises, given that the RBA's 'on-hold' decision earlier this month was well telegraphed and fully
anticipated.
* In New Zealand, the economic calendar was barren last week. RBNZ Governor Alan Bollard attempted, though, to restore
market confidence, encouraging banks and businesses to avoid over-reacting to the economic downturn. Bollard also said
that, even though economic growth will moderate, upside pressure on inflation persists. The comments were made ahead of
the 1Q CPI print (Tuesday), which will likely show annual headline moving up from 3.2% in 4Q to 3.4%. With annual
headline inflation still hovering above the central bank's 1-3% target range, we expect the RBNZ to leave the cash rate
at a record high 8.25% at least until 2009.
* The immediate threat to the global economy comes from tightening credit conditions and a US recession. More than six
months into the crisis, funding pressures in interbank lending markets persist. In the US at least, the losses generated
by poor credit decisions in the subprime mortgage and leveraged loan markets are set to be magnified by the traditional
deterioration in credit quality that accompanies a slide into recession. Reflecting the growing concern in official
quarters, the IMF's Financial Stability Report and the FOMC's March minutes each delivered a very downbeat outlook with
heightened downside risks. The IMF went so far as to describe America's mortgage crisis as the "largest financial shock
since the Great Depression."
* Alongside this risk stand emerging market economies, which continue to generate strong growth that is helping fuel the
rise in inflation. For a number of years, we have emphasized the powerful reflationary forces in place across the globe,
reflecting the interaction of strong emerging market demand, deteriorating industrial world potential growth, and easy
money. This combination has produced five years of sustained above-trend growth. It has also generated large relative
movements in global goods and asset prices—notably the rise in commodity prices and the decline in the dollar. Global
utilization rates moved rapidly higher in this environment, ending last year at their highest levels since the late
1970s. Recent releases suggest these developments are pushing global consumer price inflation to levels last recorded
before the Asian crisis. These pressures appear most intense in the emerging market economies.
ENDS