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Australia and NZ - Weekly Prospects 14 Apr 2008

(See attached file: AusNZ_weekly_14Apr08.pdf)

* Last week's Australian economic data had a weak tone, with the pace of employment growth easing, residential building approvals flat, and both business and consumer confidence sliding. This strengthens the recent evidence that growth in domestic demand has peaked. Similarly, this week is likely to see more modest growth in the number of home loans in February, partly owing to the RBA's rate hike early in the month. This week also sees further RBA action, with the April Board meeting minutes released on Tuesday, just before Governor Glenn Stevens speaks in Canberra. The minutes should not contain any surprises, given that the RBA's 'on-hold' decision earlier this month was well telegraphed and fully anticipated.

* In New Zealand, the economic calendar was barren last week. RBNZ Governor Alan Bollard attempted, though, to restore market confidence, encouraging banks and businesses to avoid over-reacting to the economic downturn. Bollard also said that, even though economic growth will moderate, upside pressure on inflation persists. The comments were made ahead of the 1Q CPI print (Tuesday), which will likely show annual headline moving up from 3.2% in 4Q to 3.4%. With annual headline inflation still hovering above the central bank's 1-3% target range, we expect the RBNZ to leave the cash rate at a record high 8.25% at least until 2009.

* The immediate threat to the global economy comes from tightening credit conditions and a US recession. More than six months into the crisis, funding pressures in interbank lending markets persist. In the US at least, the losses generated by poor credit decisions in the subprime mortgage and leveraged loan markets are set to be magnified by the traditional deterioration in credit quality that accompanies a slide into recession. Reflecting the growing concern in official quarters, the IMF's Financial Stability Report and the FOMC's March minutes each delivered a very downbeat outlook with heightened downside risks. The IMF went so far as to describe America's mortgage crisis as the "largest financial shock since the Great Depression."

* Alongside this risk stand emerging market economies, which continue to generate strong growth that is helping fuel the rise in inflation. For a number of years, we have emphasized the powerful reflationary forces in place across the globe, reflecting the interaction of strong emerging market demand, deteriorating industrial world potential growth, and easy money. This combination has produced five years of sustained above-trend growth. It has also generated large relative movements in global goods and asset prices—notably the rise in commodity prices and the decline in the dollar. Global utilization rates moved rapidly higher in this environment, ending last year at their highest levels since the late 1970s. Recent releases suggest these developments are pushing global consumer price inflation to levels last recorded before the Asian crisis. These pressures appear most intense in the emerging market economies.


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