Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The Australian economic calendar swells this week with the release of the minutes of the RBA Board’s last meeting in early April and the first quarter inflation numbers. There also is a speech by the RBA Governor. Our forecast is for headline inflation to fall back within the RBA’s 2-3% target range for the first time since 2Q07. Unusually, though, the inflation report should have few direct implications for our RBA call. The Board minutes should reveal the extent to which officials at the April 7 policy meeting balanced the need to lower market interest rates against a desire to preserve policy ammunition. The market’s main focus, though, will be on any evidence that rising bank funding costs played a role in the Board’s decision to push through a small rate cut. We expect officials to trim the cash rate target twice more on route to a terminal rate of 2.5%.

• In New Zealand, the retail sales data for February showed an unexpected rise. A closer look, though, showed that core sales continued to fall and trend sales extended the most prolonged period of decline on record. Such weak domestic consumption growth, combined with problematic conditions offshore, the falling terms of trade, and subdued inflation pressures, provide ample scope for the RBNZ to continue lowering the cash rate. We forecast a 50bp OCR cut in April. The 1Q inflation report last week, which showed headline CPI at the very top end of the RBNZ’s target range, will not be the primary concern for Governor Bollard on April 30.

• The latest flow of economic and financial market news is gradually laying the foundation for a second-half recovery in global growth. Three complementary recent developments are worth highlighting: traction, broad financial condition improvement, and the rise in April surveys. The forecast that consumption will stabilize this quarter is based on the view that the sharp slide in household spending and confidence at the end of last year represented a front-loaded adjustment to anticipated bad times. If we are right, global consumer confidence should move modestly higher as financial conditions improve and labour market weakness fails to validate the elevated fear at the start of the year. Already, US readings are pointing in this direction. Against the backdrop of a dramatic pullback in the level of output in recent months, this outcome will allow businesses to continue to successfully cut inventories and costs, and will signal that an end to these adjustments is not far off.

• Another reason for optimism that global consumers will not buckle is the continued increase in the amount and breadth of fiscal stimulus being directed at the world economy, which we now estimate at 2% of this year’s global GDP. Increasingly, Asia is assuming the leadership in this process. China is at the forefront; last week’s reports showed that these policies are bearing fruit. GDP growth accelerated from a virtual stall in 4Q08 to nearly 6% annualized in 1Q09; moreover, March activity data including exports, retail sales, fixed investment, and IP delivered across-the-board upside surprises, as did bank lending. All told, the forecast for a return to above-trend growth beginning this quarter looks firmly on track.

Read The Full Weekly Prospects Here (pdf)

ENDS

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