Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

The highlight in Australia last week was the release of the minutes from the RBA’s Board meeting. The minutes revealed that the decision to leave the cash rate unchanged at 3.25% was a close call, with Board members seeing “reasonable cases” for a rate cut and for leaving policy steady. This week, we changed our RBA call—the next rate cut now looks likely to come on April 7, even though officials hinted they want more time to assess the impact of stimulus already delivered. We had expected the RBA to wait until midyear before easing again, but the “luxury” of spending time on the sidelines has been swamped by the impact of recent events offshore, which call for more urgent action. We now look for a 50bp rate cut in April and a 25bp cut in early May. Even then, the risk is that the cash rate goes below our forecast for the terminal rate of 2.5%. With this week’s data calendar virtually barren, the highlights are speeches by RBA officials and the RBA’s Financial Stability Review.

• It was a quiet week across the Tasman last week, but this week the data flow picks up with the release of New Zealand’s fourth quarter GDP and current account numbers. We expect the economy contracted for the fourth consecutive quarter in 4Q08, and that the current account deficit narrowed. The CAD, though, will account for a larger portion of GDP, which will concern Kiwi authorities given that a ratings downgrade remains possible if the fiscal imbalances are not addressed.

• J.P. Morgan’s core economic outlook reflects contrasting perspectives about the forces at work in the global economy. Over the course of 2009, we see the powerful corporate retrenchment in train at the start of the year gradually fading, allowing a deep 1H09 recession to be followed by a modest growth recovery in 2H. The key to this view is the short-circuiting of negative feedback loops from falling employment and output to credit market conditions and consumer demand. Policy is expected to play a constructive role in this process, boosting demand and supporting an improvement in credit conditions.

• In tracking the near-term view, it is clear that 1Q09 delivered another large contraction in global GDP. However, the quarter was also marked by a significant swing toward stabilization in consumption, one that has allowed firms to make progress in their efforts to lower inventories and stabilize profit margins. With households no longer receiving support from falling energy prices, sustaining this constructive dynamic through midyear will likely require additional policy support. In this regard, it is encouraging to see that significant policy stimulus is being applied. Led by the US and China, fiscal policy should lift global growth more than one percentage point beginning in 2Q09.

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