Australia and NZ - Weekly Prospects 10 Mar 2008
(See attached file: Weekly_100308.pdf)
* The RBA hiked interest rates 25bp as expected last Tuesday and maintained a clear bias to tighten policy, even though the commentary was less hawkish than expected. The rapidly deteriorating inflation outlook means that we are still forecasting another rate hike in May, following the release of 1Q CPI data in late April. A barrage of top-tier economic data was released last week. Annual GDP growth remained above potential in 4Q, while the current account deficit widened significantly. January dataâ€”including retail sales, trade, and building approvalsâ€”fell on the downside of market expectations. This week, February employment data should show that job growth remains solid, while consumer confidence has weakened. Home loans probably rose 1.0%.
* In New Zealand, the RBNZ left the official cash rate (OCR) steady at 8.25% last week, and offered a neutral commentary acknowledging increased downside risks to growth and persistent inflation pressure. Housing market data in the week ahead (from REINZ) will likely show further deterioration in the housing market. QVNZ house price data, out this morning, showed a further deceleration in house price appreciation to the lowest level in three years. Retail trade data will remain soft in January owing to rising petrol prices, falling stock prices, the shaky housing market, and rising interest rates. JPMorgan forecasts retail spending to rise just 0.3%m/m in January.
* The US February payroll report showed a much sharper deterioration in private sector hiring than had been anticipated and has convinced us that the US economy slipped into recession in early 2008. Combining the February drop in private payrolls with revisions to the previous two months, the report posted a cumulative loss of 196,000 private sector jobs. Even outside of housing-related sectors, hiring has ground to a halt. With household purchasing power being squeezed by rising inflation and household wealth contracting, consumer spending now looks set to stagnate during the first half of the year, a message likely to be reinforced by this week's February retail sales report. Adding in an intensification of the construction downturn, we now forecast a modest contraction in GDP growth in 1H08 of 0.5% (annual rate).
* With the US payroll report pointing to a slide into recession, the Fed is likely to push the real fed funds rate into negative territory quickly. We now expect a 75bp ease at the March 18 meeting, with a significant possibility of an earlier inter-meeting move, and a fall to 1.75% by the end of April.
* In addition to the US, we have cut 2008 growth forecasts for Western Europe and Japan. Although recent data have prompted an upward revision to our current-quarter GDP estimate for Western Europe, the slide into recession in the US is a significant event for the region. With financial conditions worsening, and US demand softer, growth in Western Europe is set to be lower than previously expected. We have revised growth down noticeably. On average across the region, GDP is likely to be running at a 1.0-1.5% pace (ar) by the summer.