Australia and New Zealand - Weekly Prospects
• Inflation pressure remained significant in Australia in 2Q, as last week's data showed. Inflation, though, should peak
in 3Q, before easing back towards the RBA's target range in 2009. In a change of forecast, we now expect the RBA to cut
interest rates in early 2009 - previously, we had the RBA on hold. The disinflationary impact of the weakness in
domestic demand should be a more powerful force than the boost from the terms of trade. We forecast three more rate cuts
later in 2009, which will take the cash rate to 6.25% by the end of the year. Retail sales and credit data this week
should confirm that domestic demand continued to weaken in June, while the trade deficit should narrow.
• In New Zealand, the RBNZ cut the official cash rate (OCR) 25bp last Thursday, a close decision forecast by only four
of 13 market economists. We believe the RBNZ now has embarked on what will be an extended easing cycle; we forecast a
further three 25bp cuts to the OCR this year. Even though inflation will remain elevated, we expect that the RBNZ will
continue to cut interest rates throughout 2009, too, which will leave the OCR at 6% at the end of 2009. The NBNZ
business confidence survey this week should show a slight improvement in confidence in July, owing to heightened
speculation of imminent interest rate cuts.
• The major macroeconomic development of recent weeks is the sharp slide in Western European growth momentum. After a
surprisingly firm turn into the year, industrial indicators have contracted and business surveys have dived into
midyear. Composite PMIs are now pointing to stagnant second-half performance in the Euro area and outright contraction
in the United Kingdom, a development incorporated in recent forecast revisions. Our projections anticipated a midyear
rotation in global growth whereby the US economy fared a little better while Western European activity downshifted. The
magnitude of both sides of this rotation has been a surprise. While next week's US 2Q08 GDP release is anticipated to
post a 2.4% gain (q/q, saar), the Euro area economy is estimated to have contracted last quarter. Stepping back, it is
remarkable to observe that US GDP growth over 2007-08 is now tracking well above our expectations for the Euro area over
this period.
• While the spotlight recently has been on the downshift in European growth, Japan's economy is displaying comparable
weakness. Last week's reports showed that export volume contracted at a double-digit pace in 2Q. The export slide
reinforced weakness in other key sectors, notably consumer spending and business equipment expenditures, to produce an
expected downturn in GDP last quarter. This week's releases will help firm up our 2Q GDP estimate (-1.5%q/q, saar,
released on August 13), while also giving some indication about momentum heading into the current quarter. A further
slide in manufacturers' production plans (in the IP report) and in the small business survey would reinforce concerns
that the economy has tipped into recession.
See... AusNZ_weekly_28Jul08.pdf