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Australia and NZ - Weekly Prospects - 28 Apr 08

Australia and New Zealand - Weekly Prospects

(See attached file: AusNZ_weekly_28Apr08.pdf)

* Both consumer and producer price data for 1Q surprised on the upside in Australia last week. In particular, core inflation shot up to 4.3%oya, well above the RBA's 2-3% target range. JPMorgan expects, though, that the RBA will leave interest rates steady in May given the recent, marked change of tone of RBA verbiage toward a more balanced commentary, and growing signs of a loss of momentum in the domestic economy. This loss of momentum will become even clearer with data this week forecast to show slower credit growth and falling retail sales in March.

* In New Zealand, the RBNZ last Thursday left the official cash rate steady at 8.25% as expected. With inflation likely to remain above the central bank's 1-3%oya target range in coming quarters, there is little scope for the RBNZ to cut interest rates anytime soon. Adding to speculation that economic momentum will stall in 2Q, data this week should show a further fall in business confidence in April, owing to the still-elevated NZD, surging oil and food prices, a falling equity market, severe drought conditions, and ongoing concerns over the global growth outlook.

* The global economy is in the early stages of an important transition. By midyear, it should become clear that the slowdown that began in the US last summer has broadened out. Western Europe is expected to deliver subpar performance in the coming months, while the rapidly growing Asian economies are set to decelerate materially. At the same time, the US economy is anticipated to remain stagnant, but also to provide comfort as it avoids slipping into the black hole of a deep recession or severe credit crunch. Although this phase of soft global growth will extend until late this year, it will also set in motion adjustments that will promote an acceleration in activity during 1H09.

* As the global growth slowdown becomes more evenly distributed, we look for two developments to signal that this dynamic will promote better news for 2009. The first is that stresses in US financial markets gradually abate as Fed easing produces results alongside the painful adjustment in the US financial system. The recent news from markets is encouraging as equity and credit markets have improved despite sustained stress in interbank lending markets. The second is that the slowing in EM growth produces a moderation in food and energy prices in 2H08 that limits inflationary pressures and provides a modest lift to purchasing power into the new year.

As a group, central bankers are likely to remain willing to tolerate higher inflation (and inflation expectations) as their concerns about growth and financial stability linger. However, the limits to this "risk management" policy are being reached as inflation pressures continue to mount. With the fear surrounding downside US tail risks expected to fade, policymakers will turn their attention (partly) away from risk management to assessing the more "bread and butter" tradeoff between domestic growth and inflation concerns.


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