Australia and NZ - Weekly Prospects 4/05/09

Australia and New Zealand - Weekly Prospects 4/05/09

• A slew of key economic data is scheduled for release in Australia this week, the highlight being the April labour force survey on Thursday. Our forecast calls for the jobless rate to hit 6%, a sharp rise from the 3.9% recorded just over a year ago. We expect the RBA to leave the cash rate steady on Tuesday, but to signal that further policy easing remains on the table. The minutes from the last Board meeting indicated that the April decision - where the RBA cut the cash rate 25bp - was a close call. With this in mind, and with the green shoots of global recovery having grown since then, it would be a surprise for the RBA to back up so soon with a second rate cut. Other data this week includes retail sales, which probably fell in March, building approvals, the trade balance and house prices, which probably rose slightly in 1Q, owing mainly to the impact of the expanded first home owners' grant.

• The RBNZ decision last week drew significant attention across the Tasman. The statement accompanying the decision to cut the official cash rate 50bp signalled that the official rate would remain at or below the current 2.5% until the end of 2010. Our forecast calls for a terminal cash rate of 2.25% by June. Data this week should indicate that labour market conditions continued to deteriorate in 1Q, with the unemployment rate rising from 4.7% to 5.4% and wage growth moderating. Growing job insecurity and redundancies mean that workers continue to curb spending in 2009, weighing even further on the economic growth outlook.

• Economic releases continue to align with our expectation that we are in the early stages of a synchronized turn toward a second-half recovery in the global economy. Indeed, it looks likely that Asia is already growing, and there is a reasonable chance that the global economy will stabilize this quarter. We have made upward revisions to current quarter forecasts for the US and Japan. Against the backdrop of continued tight credit conditions and deteriorating labour markets, it may seem jarring to consider the global economy moving from last quarter's 6.9% decline to growth in the space of a few months. However, experience shows that it is common for GDP to decline most rapidly at the end of a recession and for a recovery to take hold with lingering financial market stress. There is something of a "paradox of lift" related to business cycle turns: many of the paradoxical features associated with past recoveries are now falling into place across the globe.

• Global inflation has plunged to the lowest level in at least five decades and is likely to turn slightly negative for at least a brief period past midyear. The two, related drivers are the collapse in global commodity prices and the severe economic recession. Because movements in oil and agricultural commodity prices pass through quickly to consumer energy and food products, their collapse had an immediate and profound effect on consumer inflation. By contrast, the inflation effects of the severe recession and the resulting plunge in resource utilization rates will take longer to develop, but will ultimately prove to be more important and long-lasting.

Weekly040509.pdf

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