Australia and NZ - Weekly Prospects 04/08/09

Australia and New Zealand - Weekly Prospects

• Last week, the RBA signaled it had tacked away from the previous commentary hinting that a rate cut was more likely than a hike. Indeed, one message from Governor Stevens’ speech was that the Bank will not wait for the jobless rate to peak before tightening—this will be an important break from convention. Today, the RBA will leave the cash rate steady, but the tone of the language will be upbeat, more in line with the Governor’s speech last week than the last policy announcement. Also, the statement will remove the implied easing bias by erasing the earlier reference to “scope for further easing.” On Friday, the RBA’s quarterly statement will include upward revisions to the official growth and inflation forecasts, which will confirm the RBA has moved to a neutral policy bias. This week also brings key economic data—the July labour force survey should deliver a jobless rate with a 6%-handle for the first time since 2003, thanks to a 25,000 drop in employment. The June retail outcome today, though, probably will print a solid monthly gain; the quarterly data should show volumes bouncing 1.7%q/q; this will make a significant positive contribution to 2Q GDP growth.

• In New Zealand, RBNZ Governor Alan Bollard remained dovish in the statement accompanying the OCR announcement last week, in which rates were kept on hold. While the market expected such rhetoric, officials surprised by strongly voicing concern about continued NZD strength and the impact the currency may have on a prospective export-led recovery. The RBNZ explicitly said that if financial conditions fail to ease, the RBNZ would “reassess policy settings.” Economic data this week should confirm that labour markets continue to deteriorate, with unemployment rising sharply in 2Q.

• Economic developments this year provide a case study in the dynamism of the global business cycle. Even as the global economy was in the midst of a severe and synchronized downturn at the start of the year, a foundation for a quick recovery was being laid. The central pillar was policy medication that proved sufficient to contain the crisis in funding markets, moderating a significant drag on the economy. This medication was also important in calming downside tail-risk fears. As such, it combined with other supports—fiscal stimulus and a drop in inflation—to stem the slide in consumer spending. The resilience of consumer demand during 1H09 was a major surprise to firms and it allowed them to make dramatic and rapid adjustment to their inventories and production costs.

• At this stage, however, the central element of our forecast is that the global recovery will have “legs”—with above-trend growth sustained for a number of quarters. To track this view, we need to look beyond coincident growth indicators and gauge whether a positive feedback loop is established. This loop entails positive reverberations from the rebound in growth—to labour income, financial conditions, and confidence—which promotes stronger spending by households and business. The power of this dynamic coming out of a deep downturn should not be underestimated.

See... AusNZ_weekly_Aug_04.pmd.pdf

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