Australia and New Zealand - Weekly Prospects

Australia Economic Research

Australia and New Zealand - Weekly Prospects

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• The remarkably strong retail sales report released in Australia last week reaffirmed our view that the RBA will deliver another 25bp rate hike in February—that is, barring any unexpected adverse shocks. Key data is scheduled for release ahead of the February Board meeting, however. This includes the December labour force survey this week. The employment report should show further job gains and the unemployment rate remaining steady at 5.7%. The housing finance numbers are expected to have fallen significantly in November, amid the phasing down of the expanded first home buyers’ grant toward year end.

• The focus in New Zealand this week will be the NZIER’s Quarterly Survey of Business Opinion. The improvement in business confidence we forecast, if it comes to fruition, will confirm our view that the Kiwi economy will continue to expand and that the RBNZ’s tightening cycle will begin before the official guidance suggests. Our call is for the RBNZ’s next tightening cycle to begin in March, even though Governor Bollard has suggested the policy stimulus will not be removed until midyear.

• The divergence between global manufacturing and service sector activity that opened up earlier this year remains stubbornly wide. In our December global manufacturing PMI survey, the output and orders indexes each rose above 58—an elevated level that points to continued boomy conditions in industry. As such, we now see global manufacturing rising at a 7% annualized pace in 1H09, capping the strongest year on record. This message is being reinforced by the gains in Emerging Asia export volumes at year-end. While global services PMI is also moving higher, its current levels of output and orders (52.1 and 51.4, respectively) point only to sluggish activity gains. Indeed, service sector PMIs in the US, Euro area, Japan, China, India, and Russia all lie below levels consistent with our growth expectations for 2010.

• For the US, the latest releases are mixed but seem consistent with our view that a broad turn in private sector behaviour is taking hold. To be sure, the December employment report failed to deliver our expected increase in payrolls. However, labour income is now rising and initial jobless claims have plunged 70,000 in the past eight weeks. At current levels, this points to private payroll gains of about 150,000 per month.

• We have trimmed our 2010 Euro area growth forecast for this year and next by roughly 0.5%-pt. Although the regional manufacturing and export recovery are continuing, consumer spending looks to have stagnated into year-end. We are inclined to see this development as a signal that consumers will remain more cautious looking ahead. Despite the downward revision, our forecast of 2.4% GDP gains (4Q/4Q) for this year is still well above consensus and ECB expectations.

ENDS

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