Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

More hawkish commentary from the RBA last week reaffirmed our view that a rate hike is imminent. We look for the RBA to announce the first 25bp rate hike in October, on the basis that, with sustained improvements in conditions domestically and offshore, an “emergency” setting for official interest rates no longer is appropriate. In the absence of a sharp reversal in key economic data, such as the retail sales numbers and confidence surveys scheduled for release this week, we see little reason for the RBA to sit on the sidelines next month. The labour force survey Thursday will, though, show a mild rise in the unemployment rate.

• We expect the RBNZ will leave the official cash rate (OCR) unchanged this week and maintain relatively dovish commentary, suggesting that the OCR will remain low for an extended period. The RBNZ will remain reluctant to get excited about the recent positive developments in the domestic economy, such as the sharp improvement in business confidence. Instead, the Governor will reiterate his concern that consumers, amid signs that the prolonged downturn in the economy has bottomed, may revert to their old “borrow to spend” habits. Our forecast calls for rate hikes from mid-2010.

• The global economy is in the early stages of a synchronized upturn that will deliver more GDP growth than is expected but less than is needed. The latest economic news reinforces our confidence in both these elements, as it points to sustained above-trend global growth along side post-WWII record high unemployment rates in the developed world during the coming year.

• Our GDP growth forecast is, however, strong only relative to that of the consensus. Deep downturns have been reliably followed by strong recoveries in the past and the 3% GDP gain forecast for the developed world over the coming four quarters falls far short of the greater than 5% gains recorded after the mid-1970s and early 1980s recessions. We are explicitly tempering cyclical lift in the face of continued tight credit conditions and ongoing balance sheet adjustments. Notably, US consumption is expected to post its smallest gain in the first year of a recovery, rising less than 2% alongside GDP growth of 3.5%.

• With growth solid but not booming, labour markets will likely stabilize only gradually. This is the message from the latest market reports, which suggest that the developed world recovery is likely to remain jobless through the end of this year. If our forecast is right, developed world unemployment rates will reach 9%—above the 1983 peak—and move only modestly lower next year. One consequence of depressed underutilization rates is already being felt. Core consumer price inflation is falling and looks set to drop below 1% in the US and the Euro area over the coming year.

Australia and New Zealand - Weekly Prospects (pdf)

ENDS

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