Australia and New Zealand - Weekly Prospects
• The RBA's quarterly Statement on Monetary Policy last week signaled clearly that RBA officials are close to cutting
the cash rate. Officials are placing significantly more emphasis on the downside risks to growth than the upside risks
to inflation. We expect the first rate cut to be a 25bp move in early September. In our view, RBA officials will be
reluctant to throw the economy a lifeline in the form of a 50bp rate cut as soon as there is evidence that the economy
is stumbling. Indeed, the easing cycle will end with the cash rate still on the tight side of neutral. Also, AUD's steep
decline lessens the need for the RBA to kick the easing cycle off with a 50bp move, even though each of the last two
easing cycles - in 1996 and 2001 - started with 50bp cuts. The economic circumstances at the start of each of these
easing cycles were significantly different from those prevailing now. This week's RBA Board minutes probably will
endorse the view that the cash rate will be cut 25bp in September.
• Retail sales data were the highlight in New Zealand last week in what otherwise was a very quiet week. In real terms,
retail sales slumped 1.5%q/q in 2Q, the largest fall on record; this was the first time since June 1998 that volumes
have fallen in two consecutive quarters. The negative wealth effects from the sharp deterioration in the housing market
and rising living costs clearly have led consumers to rein in discretionary spending. Consumer spending should recover
in 2009, however, now that the RBNZ has embarked on what is likely to be an extended easing cycle. Inflation remains
elevated, however, and producer price data this week should show that pipeline pressures persist.
• The global economy is sputtering amid a widening in the slowdown from the United States to Western Europe and Japan.
Last week's reports confirmed that output in 2Q contracted in the Euro area and Japan. In both cases, these outcomes
were exaggerated by calendar and holiday configurations and unusual weather, which boosted 1Q activity at the expense of
2Q. Still, a clear declining trend in the monthly business surveys in both regions suggests that underlying momentum has
weakened considerably past midyear. Our Euro area and Japan GDP forecasts have been marked down to reflect continued,
mild contraction in output in 3Q, followed by stagnation in 4Q.
• The deteriorating growth backdrop and the prospective fall in headline inflation is reverberating through the policy
space. Our forecast for global policy interest rates is coming down. The extended period of subpar growth is forecast to
induce a reluctant ECB to ease 75bp next year. The Bank of England's latest inflation report has opened the door to a
November ease. And in the EM, last week's communications from central banks in the South Africa, Turkey, and Mexico
signaled that their tightening cycles were over. There also is an increased likelihood of fiscal stimulus outside of the
United States. Likely candidates include the United Kingdom, Spain, Japan, and numerous EM countries including China.
ENDS