Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The key event in Australia this week will be on Tuesday night, when Treasurer Wayne Swan delivers his second Budget. With government revenues collapsing, yet ever growing demands on the public purse, the Budget will plunge into what the Treasurer describes as a “temporary” deficit. There is nothing temporary, however, about fiscal shortfalls likely to stretch out well into the next decade. We forecast a deficit in 2008-09 of A$65 billion (5.4% of GDP). The other important events this week include home finance and consumer confidence data —both should show large rises. Business confidence also should rise. The RBA statement last Friday delivered a GDP downgrade, as expected. With the RBA having delivered a mammoth 425bp of rate cuts since September, and with the government having tugged vigorously on the lever of fiscal policy, there is a mountain of stimulus in the pipeline; thus, we maintain our forecast that the RBA will remain on the policy sidelines in coming months.

• We expect that retail sales data in New Zealand this week to show that sales values fell 0.6%m/m in March. The trend in sales will continue to fall, extending the most prolonged period of decline on record—consumers have become increasingly reluctant to spend amid widespread recession fears and heightened anxiety about job security. Though the tax cuts delivered from April 1 should provide some relief going forward, we believe a significant portion of these tax cuts will be saved. Data last week showed a milder than expect rise in the unemployment rate, although the jobless rate (at 5.0%) now is at a six-year high.

• As we move toward a second-half global recovery, attention is increasingly focused on the contours of the coming expansion. Conventional wisdom sees sustained subpar growth as the likely path in the wake of a financial crisis that will keep credit conditions restrictive for some time to come. In contrast, we are becoming more confident that a period of sustained above-trend global growth will take hold by year end. In Asia, this bounce could come quickly, as the rebound in industrial activity now taking hold is levered by the major near-term fiscal stimulus in Japan and China. In the US and Europe, we expect the lift-off to gather steam more gradually, as drags from credit markets and weak business demand linger for some months to come.

• Asia’s economic fortunes continue to brighten, with many economies set to return to growth as soon as the current quarter. China is at the forefront of this process, reflecting its internal dynamism and its role as a regional locomotive. A month ago, China’s March activity data signaled a likely return to above-trend growth. This week’s April data round should cement the case, based on a combination of accelerating fixed investment, continued solid consumption, and firming exports. All told, these developments comport with our view that IP rose close to 1%m/m last month. Fiscal stimulus is playing an important role in promoting growth, as seen in the recovery in public sector investment and the surge in auto and housing-related spending. Monetary policy also is playing its part.

ENDS

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