Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

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• Last week’s Aussie calendar was littered with RBA commentary, the highlight being the Governor’s marathon session in front of federal MPs on Friday. The bottom line from all this official noise? The RBA paused in February mainly because the Aussie banks had out-hiked the RBA, and because it was not clear how households were coping. The sovereign events in Europe mattered, but only at the margin. Taking this at face value, we suspect Board members will be little wiser about households at the next Board meeting on March 2, so will be inactive again. The next hike probably will come in April, but the risks offshore mean the pause could be longer than we currently forecast. The RBA Deputy Governor steps up with a speech this week, but the highlight on the calendar will be the business investment survey Thursday. We expect big upgrades to firms’ spending plans relative to the previous survey. We also should see a small gain in the pool of credit outstanding and a bounce in construction work.

• The recovery in New Zealand has lost momentum. Indeed, a string of weaker data recently has brought to the fore our concerns about the fragility of the domestic economy. Among the recent data points to disappoint were a spike in the unemployment rate and a fall in house prices. With this in mind, we have pushed out our expected first tightening for the RBNZ to July from April. RBNZ Governor Bollard wants hard economic evidence of an entrenched recovery before embarking on a tightening cycle. Waiting, though, and allowing inflation pressure to build, means the RBNZ will have to tighten more aggressively. We expect a 50bp hike in July and another in September, before the RBNZ shifts back to 25bp hops thereafter.

• The most striking element of recent performance is the relative standing of countries within the developed world. Sitting at the epicenter of the global financial crisis—which produced a dramatic rise in unemployment and household saving rates—there was every reason to have expected the US to be the weakest link in the global recovery. However, the US did not fall as hard as many other economies and is now expanding well above trend. As a result, it stands close to global averages that compare activity levels to previous cyclical peaks. While the better performance of EM economies is easy to understand, the relatively sluggish recoveries under way in Western Europe and Japan are troubling. Our forecasts project US GDP to retrace the losses seen in the entire recession by the middle of this year. For the Euro area and Japan, this retracement is not expected to be realized until some time in 2012.

• Easy money and strong industrial activity have provided a boost to oil and other commodity prices, which have more than doubled over the past year. This movement is lifting over-year-ago headline inflation across the globe, an effect that should peak in the next few months if commodity prices stabilize near current levels. As we have emphasized for some time, this move is masking the main inflation event of 2010—the slide in developed world core inflation. High levels of unemployment and depressed capacity utilization are exerting steady downward pressure on core price and wage inflation.

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