Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The key event in Australia this week is the RBA decision on Tuesday; our forecast calls for a 50bp cut to the cash rate. We acknowledge that the decision is a close call, just as it was at the last Board meeting in March. Indeed, we would not be that surprised if officials left the cash rate unchanged this week or, for that matter, if they decided only on a 25bp rate cut. With uncertainty high, the latter would be a neat compromise between the all (-50bp) and nothing alternatives. The case for a rate cut hinges on whether RBA officials determine they already have delivered sufficient monetary support to counterbalance the impact of the avalanche of bad news on the domestic and offshore economies; our view is they have not. The main counter argument is that RBA officials want to preserve as much of their policy ammunition as possible for use at a later date. In particular, RBA officials will want room to move as unemployment soars. On this, data this week will show a 30,000 plunge in employment and another sharp rise in the jobless rate. The consumer confidence and home loans data, though, should show improvements.

• In New Zealand, ahead of a quiet week on the economic front, data last week showed that firms’ own activity expectations worsened in March to a near record low, pointing to sharply weaker economic growth in coming quarters. Midweek, RBNZ Governor Alan Bollard, in an rare statement, voiced his concern about the recent rise in long-term interest rates, which he believes has been unwarranted as the cash rate is likely to remain low for an extended period. The OCR will likely fall further, although not beyond a level that is unattractive to offshore investors given the country needs to continue funding its burgeoning current account gap.

• Economic reports for March show a broad based rise in business surveys and auto sales, bolstering confidence in our view that the global economy is on track to begin a recovery in 2H09. However, the latest news does not indicate that the grip of a deep contraction has yet to ease. In the quarter just completed, global GDP and IP are tracking annualized declines of 6% and 30%, respectively. Job shedding is intensifying and cutbacks in inventories and capital spending remain a prime focus of corporations.

• Some indicators finally have begun to point to some marginal improvement in the Japanese economy. In particular, the monthly Shoko Chukin small business sentiment survey and the manufacturing and services PMIs each posted significant gains in March. In addition, the February IP report, while it delivered another extremely large drop in output, indicated that manufacturers plan to raise output in March and April. Together, these signs raise the possibility of a significantly reduced rate of contraction in manufacturing and GDP in the current quarter. So does the government’s fiscal package, which will support consumption via the distribution of JPY2.0tn to households. The government is expected to announce another large supplementary budget in a couple of weeks. The details have not yet been disclosed, but the size of the package is expected to be significant, at least ¥10tn (2% of GDP) spread over 2 years.

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