Australia Economic Research

Australia and New Zealand - Weekly Prospects

Click here for the full Note and disclosures.

• Last week’s plunge in the Aussie consumer confidence reading all but confirms that the pain threshold for many households has been crossed. It always was challenging to identify the precise timing of said crossing before the event, but we recognize it now that it’s happened. Indeed, the dive in confidence compliments cautious anecdotes from retailers signaling that consumers have pulled in their horns in the wake of the RBA’s assertive rate hikes since October. The good news is that the weakness in household spending and the troubling events in Europe mean the Reserve Bank probably is on hold for a while, despite the deteriorating inflation outlook. Indeed, it now looks as though the pause we anticipated in June will extend until at least the August Board meeting. The highlight in the week ahead will be the 1Q business investment survey; 99% of the survey results pre-date the “shock” announcement of the new tax on mining company profits.

• The New Zealand Budget this week delivered few surprises. Personal income tax cuts, a hike to the goods and services tax (GST), and changes to the way property is taxed were consistent with our expectations. The Budget is slightly stimulatory near term, with the income tax cuts to more than offset the GST hike (both effective October 1). With contractionary measures coming into effect April 1 next year, however, it will be relatively neutral thereafter. We suspect that the Budget will be viewed by the RBNZ in the same light. Market pricing now suggests a 50:50 chance of a June move, but we maintain that the first rate hike will be delivered in July. Growing uncertainties in the Euro area and weakness in some of the domestic indicators suggest the RBNZ has scope to sit on the sidelines for a little bit longer.

• Our outlook for the developed economies incorporates a fundamental tension. On one side are forces lifting activity from depressed levels, which we judge as powerful and synchronized. Perhaps most important, there appears to be enough fuel to sustain above-trend growth for at least another year as the private sector’s shift away from its defensive stance is still at an early stage. On the other side, this cyclical lift is not likely to generate sufficient growth to heal developed-world labour markets and public finances, which have been severely damaged by the recession. What’s more, worrisome social pressures are building due to the slow and uneven nature of the healing process. In recognizing these tensions, we have coined the phrase “bouncing towards malaise” to characterize a forecast that is both optimistic about cyclical lift and sober about the medium-term consequences of the policy choices taken in this environment.

• Core inflation in the G-3 economies tumbled to 0.4%oya in April, based on last week’s reports for the US and Euro area and our forecast for Japan (-1.9%oya ex food and energy, due this week). The continued slide has confirmed our belief that the record high amount of resource slack would create a highly disinflationary backdrop in the world’s largest economies. Our long-standing call has been that G-3 core inflation will decline to near zero by late this year, with historic lows of 0.3%oya in the US and 0.6%oya in the Euro area (4Q/4Q).

ends

© Scoop Media