Australia and New Zealand - Weekly Prospects

Australia Economic Research

Australia and New Zealand - Weekly Prospects

 
• The string of softer economic data released in Australia early last week, including falls in consumer confidence and home loans, was overshadowed by yet another remarkably strong employment report. The fact that the jobless rate now is likely to peak close to 6%, if not below, means the risk of the emergence of capacity constraints has risen. This reaffirms our view that the RBA will continue tightening policy throughout 2010.

Our forecast is that the RBA will hike again in February, and that the cash rate will be 5% at the end of next year. The release Tuesday of the minutes from the last RBA Board meeting should not surprise—the decision two weeks ago to hike the cash rate was uncontroversial. The 3Q GDP report on Wednesday, then, will be the highlight of the week. The economy should have expanded 0.5%q/q, a slightly slower rate of expansion than in the previous quarter, but nothing to be too concerned about, given that net exports will have drained 1.8%-points from growth in the quarter.

• In New Zealand, the RBNZ unexpectedly shifted to a tightening bias last Thursday, from the implied neutral bias established six weeks earlier. The RBNZ opened up the possibility that the policy accommodation in place may start being removed from mid-2010, providing economic conditions continue to improve. The more upbeat tone of the commentary accompanying Governor Bollard’s decision to leave the cash rate unchanged prompted us to bring forward our call for the RBNZ’s first rate hike to March, from July. We now expect “only” a 25bp rate hike (compared to 50bp previously) to kick off the next tightening cycle.

Tighter financial conditions will do some of the heavy lifting for the RBNZ
• The US economy is showing clear signs of acceleration as the improvement in recent labour market readings (claims and payrolls) is accompanied by upbeat readings on international trade and retail sales. In response to this news, we have raised our current-quarter GDP forecast to 4.5%q/q saar.

In sharp contrast, Japan’s incoming news has been very weak. A large downward revision to investment spending (from a solid gain to a double-digit annualized decline) lowered the estimate of last quarter’s GDP gain to 1.3%q/q saar, and a number of November business surveys have moved lower. While we maintain that GDP in Japan will expand 2.5% annualized this quarter, we now expect growth to fall below 2% during 1H10.

• Growth rebalancing was the theme of the annual Chinese Central Economic Work Conference, which ended last week. The top leadership emphasized support for domestic demand, especially private consumption, as an important driver of economic growth next year. In particular, the conference extended into 2010 a series of consumption-related stimulus measures, including incentives for spending on autos and home electrical appliances. These moves came against a backdrop of robust November activity data, released Friday. Overall, the latest data flow and policy tone are consistent with our outlook for GDP to expand 9.5% next year.  

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