Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

Click here for the full Note and disclosures.

• A quiet week in Australia last week will be followed by another this week. The only economic data of note scheduled for release is today’s motor vehicle sales report for February—we expect a big fall in sales as the impact of the expanded investment allowance fades. The highlight this week, therefore, will be speeches by RBA officials and the RBA’s Financial Stability Review. Phil Lowe, Assistant Governor (Economic), speaks to the Australian Industry Group’s 10th Annual Economic Forum in Sydney on Thursday, while Governor Stevens speaks to the ACI 2010 4th World Congress the following day. These speeches probably will reinforce the message that, while official interest rates have some way to rise, the RBA has time on its side. We expect the next 25bp rate hike in early May.

• The economic data emerging from New Zealand of late has disappointed, putting question marks over the sustainability of the recovery underway. The next key piece of economic news is the fourth quarter GDP report this coming Thursday. This belated release should show GDP rose a decent 0.6%q/q in 4Q09, with private consumption again the key driver of growth. That said, more timely monthly data suggests that consumers are becoming more risk averse. Demand for credit, in particular, continues to slide. Consumer credit growth, for example, has been negative for 11 straight quarters, recently tumbling 4.9%oya in January. The RBNZ, therefore, also has time on its side. We maintain our forecast for the first rate hike to be delivered in July, later than the consensus call for a June move.

• With global growth downshifting somewhat early this year, recent debate has revolved around how well our upbeat growth forecast is tracking. However, an equally important component of our 2010 outlook is that developed world core inflation will fall sharply amid synchronized above-trend growth. Here the news has been quietly decisive as core inflation is steadily sliding. US core consumer prices have stabilized over the past four months and the year-ago rate of change (currently 1.3%oya) is on track to fall below 1% for the first time since 1966. Meanwhile, Euro area core inflation has already dipped to 0.8%oya, and Japan is in the midst of its deepest bout of deflation in modern times with core prices now falling at a 1.1% pace.

• The divergence in core inflation trends between developed and emerging economies provides further support for the view that movements in utilization rates are playing a key role in shaping the inflation and policy outlook. As a group, emerging markets have more fully recovered pre-recession activity levels. With their economies close to overheating in mid-2008, this rapid recovery has pushed utilization rates slightly above their long-term norms. It is thus no surprise that EM core inflation appears to have already stabilized. This sets the stage for a sustained climb in overall inflation, when combined with the rapid rise in heavily weighted food prices across much of the EM block (measured on a year-ago basis). These inflation dynamics will put added pressure on EM central banks to normalize policy, especially in EM Asia, where asset price inflation already is causing concern.

ENDS

© Scoop Media