Australia and New Zealand - Weekly Prospects

• Tuesday’s RBA Board decision is a very close call—we favour a 50bp rate cut, but without our usual high level of conviction. RBA officials have indicated that the main drivers of monetary policy are offshore events, and the news from overseas since the last Board meeting has been uniformly bad. Another “modest” rate cut will help cushion the downside for Australia’s economy, when it inevitably comes. That said, last week’s upbeat data hinting that the local economy still is travelling well, and recent official commentary hinting at a pause, mean officials may in fact take a “breather.” Pausing will allow officials to gauge what impact the monetary and fiscal stimulus already implemented was having on the economy. We are, however, sceptical about the merits of saving policy ammunition for later—if there is a case for lower rates, why not deliver the policy stimulus now? Last week, we upgraded our 4Q GDP forecast following the upbeat capital spending data. We forecast flat GDP, compared to our previous forecast -0.5%q/q, but will finalize the forecast after this week’s current account, public spending, and inventory data.

• The highlight in New Zealand last week was the NBNZ business confidence survey. The measure of firms’ own activity expectations remained near record lows, pointing to negative GDP growth in coming quarters. Our forecast calls for six straight quarters of falling GDP. The prolonged recession, easing inflation expectations, the problematic global economic and financial market outlook, sagging domestic house prices, and the falling terms of trade, provide ample scope for the RBNZ to continue easing policy assertively. We recently changed our forecast to include a 100bp cut to the cash rate in March, and a terminal cash rate of 2%, down from 2.25%.

• On the global economy, over the past three weeks, data releases have turned an already dark picture of current performance decidedly bleaker. Our current estimate of global GDP growth for last quarter now stands at -6.7%, an outcome close to 2% points weaker than our estimate at the start of this month. More importantly, it is a full 2% points below the worst global quarter in our historical record (since 1960). January releases provide little reason for cheer. Production declines are continuing at a double-digit annualized pace and the anticipated retrenchment by businesses is both intensifying and broadening across the globe. Global GDP is currently tracking a greater than 5% pace of decline this quarter.

• We will stress test our views with upcoming data releases. This week, the US should post continued intense employment declines for February (-650,000). However, the January consumption report, alongside February auto sales, should indicate that consumption declines are moderating this quarter. We look for our February global PMI output index to move modestly lower, indicating that inventories are being drawn down and that a bottom is being formed in the order series. Upcoming Asian February trade reports are likely to show that some of the intense declines in January reflected noise around the timing of the lunar new year.

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