Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The RBA decision was the highlight in Australia last week, although
the unexpected spike in the jobless rate to 5.7% ran a close second. By
delivering “only” a 25bp cut to the cash rate, RBA officials essentially
kept their ammunition in reserve, while simultaneously providing modest
interest rate relief to borrowers. The Aussie banks, however, did not come
to the party, angering Government officials by passing on to market rates
only a fraction of the cut to the official rate. The RBA will pull the
trigger on rates at least twice more before year-end—it will be difficult,
in particular, for RBA officials to sit on their hands as unemployment
soars. The RBA’s desire to dissuade the major banks from raising home
mortgage interest rates, owing to rising funding costs, will be a key
driver of official policy from here. In this context, the dominant risk is
that the cash rate goes below 2.5%.

• In New Zealand, a quarterly business survey last week highlighted the
risk that the recession underway will be even more prolonged than we
currently forecast. Our forecast calls for the Kiwi economy to contract
for at least another two quarters, having already contracted in each
quarter of 2008. As such, as insurance against a deeper downturn, we now
expect a 50bp rate cut on 30 April, not 25bp. Data released this morning
confirmed that the household sector remains in dismal shape, with retail
sales ex-autos falling 0.1%m/m in February. Other data this week should
reaffirm that any concerns about inflation can, for the time being, remain
on the backburner.

• The drag from tighter credit conditions on global growth is fading—as
demand for credit has adjusted downward and as aggressive policy action
contains the crisis. As this drag fades, more traditional cyclical
dynamics of supply and demand are reasserting themselves. Incoming reports
point to the supply of output moving well below already depressed levels
of global demand. With these adjustments being supported by ample policy
stimulus, the stage is set for a parting of the seas which returns a
beaten down global economy to growth during the second half of this year.

• In Japan, hopes are rising that the economy will return to growth
after midyear. Already, the broadly-based upturn in business surveys
points to a much diminished rate of decline in GDP this quarter. Progress
in reducing unwanted inventory is playing a role, as seen in the plunge in
manufacturers’ inventory and the surprisingly near-term strong production
plans. But the more abiding factor is the amount of current and
prospective policy support.

• This week’s reports should confirm that China’s economy regained
momentum in early 2009. The pickup was led by domestic demand, while
exports continued to slide. More important than the 1Q GDP outcome,
however, is that the March activity reports and bank loan data should show
that the economy was gaining speed heading into the current quarter. Fixed
investment is accelerating as major infrastructure projects break ground.

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