Australia & NZ - Weekly Prospects, 24 August

Australia and New Zealand - Weekly Prospects

• The highlight in a thin week in Australia was the release of the minutes from the RBA’s Board meeting on August 4. They reveal that officials are inching toward the first official rate hike, which we forecast for February 2010. First, though, they want to see how key uncertainties are resolved. Board members, for example, want to see confirmation that global risks have diminished sufficiently to start withdrawing the generous policy support. Also, they want more clues on how the domestic economy is holding up without new stimulus. The highlight this week is the private investment survey for the June quarter, which will measure the extent to which firms have pulled investment plans. The capex data, and Wednesday’s construction work report, are key inputs to 2Q GDP, which looks likely to be strong on the back of firm (but policy-supported) consumer spending. In other data, car sales probably dropped sharply in July owing to sales being dragged forward by the expanded investment allowance announced in the Budget in May.

• In New Zealand, the highlight last week was the June quarter producer price data. With input prices flat, but output prices falling again, profit margins are being squeezed. This probably will add to the caution of the corporate sector, which already is retrenching spending and employment.

• With 2Q GDP releases now available for a wide range of countries, the spark for recovery provided by Asian and emerging market consumers can be documented. Following four consecutive quarters of decline, global consumption rose last quarter, despite a further decline in US spending. Japanese consumer spending grew an annualized 3%, with even stronger gains reported in Korea (14.0%) and Taiwan (4.3%). Our estimates place emerging market consumption (excluding China) gains at about 6%. Overall global consumer spending increased a modest annualized 1.5%, but this gain was a major surprise to corporations expecting a continuation of the recent dismal trend. As a result, production levels became depressed relative to demand and firms have begun to raise expectations about demand trends. This is the stuff that recoveries are made of.

• With the debate turning toward growth sustainability, it is important not to extrapolate forward last quarter’s consumption outcome. Indeed, spending received a significant lift from fiscal stimulus, particularly from incentives to purchase autos. At the same time, labour market conditions continue to weigh on income. Most likely, global consumer spending will eke out small gains in coming months, but will not accelerate in a manner that confirms growth sustainability. It would be a mistake however, to view sluggish consumer spending as a sign that the growth recovery is about to stall. Given the current large gap between levels of production and demand, we expect 8% annualized growth in global industry during 2H09 to be accompanied by a further fall in inventories. What’s more, the spark that was lit last quarter is expected to produce important changes in business spending, labour markets, and financial conditions that should lay the foundation for sustained growth in consumer demand in 2010.

Aus NZ Weekly Aug 24 (pdf)

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