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Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

See... AUS_NZ_weekly.pdf

- Minutes from the RBA's monetary policy meeting released last week showed that Board members considered hiking interest rates 50bp at their February meeting. The RBA decided to hike the cash rate 25bp on February 5, but debated the need for a larger move. The labour price index last week showed that wage growth picked up in 4Q, rising 1.1%q/q. This week's capital expenditures survey will likely show business investment rebounded in 4Q. Solid business investment should help boost productive capacity and alleviate pressure on stretched resources which should, eventually, assist in curbing inflation. The RBA's private sector credit aggregates on Friday will probably show credit growth eased in January.

- In what was a relatively quiet week in New Zealand on the economic data front last week, the ASB housing confidence survey showed that optimism on the direction of house prices continued to weaken. The sharp downturn in the housing market, coupled with the recent drought, are likely to be the two key developments in the RBNZ's rhetoric, which will be painted in the next monetary policy statement on March 6. In other data, electronic card spending showed a substantial 0.6%m/m drop in spending on core retail goods (excluding vehicle-related industries). Higher petrol prices and rising interest rates are taking their toll.

- The most immediate concern facing the global economy is the fallout from a potential US recession. The resulting sustained contraction in profits and labour income would magnify stress in credit markets that are already impaired. A US recession also would likely spill over to parts of the global financial marketplace that have, as yet, remained relatively unharmed. At present, US growth appears to be stalling, but the economy has shown little sign of a pronounced shift in business and household behaviour that would mark the onset of recession. To be sure, the economy is on a razor's edge, and household purchasing power appears to be getting less relief than expected this quarter from food and energy prices. In addition, continued widening in credit spreads is thwarting the transmission of Fed easing to private sector borrowing rates.

- In the US, policymakers' aggressive actions to offset recession risks make sense, given the potential for large adverse consequences of a negative feedback loop between growth and credit market stress. Chairman Bernanke is likely to emphasize this risk in this week's testimony, laying the groundwork for additional easing next month. If the US economy is sliding into recession, policy actions that will deliver a large midyear tax rebate and a zero real funds rate will provide a sizable cushion in 2H08. However, if the US economy skirts recession, policy will add to growth as the drags fade from energy prices increases, declining residential construction, and inventory drawdowns. In this case, the stage will be set for US growth to move above 3% in 2H08, while keeping core inflation well above the top of the Fed's comfort zone.

See... AUS_NZ_weekly.pdf

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