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Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects
(See attached file: AusNZ_weekly_21jul08.pdf)

• The focus in Australia this week will be the 2Q PPI and CPI prints on Monday and Wednesday, respectively. Core CPI probably will print at 1.2%q/q, the highest reading since 1990. This will take core inflation to 4.4%oya, but elevated inflation readings no longer are triggers for RBA policy action - trends in domestic demand now are more important. There was no top-tier economic data in Australia last week, leaving market pundits to focus on a speech by RBA Governor Glenn Stevens. The market viewed the comments as more dovish than previous RBA verbiage, even though the speech offered little new information. The Governor acknowledged the slowdown in domestic demand amid hawkish sentiments about inflation. We maintain that the RBA will leave interest rates steady for the remainder of the year, even though data this week will show headline and core CPI running well above the RBA's target range.

• In New Zealand, data last week - including an upside surprise on inflation and a strong retail sales ex-autos print - reaffirmed our expectation that the RBNZ will leave rates unchanged on Thursday. Although the economy may be in the midst of a technical recession, widespread inflation pressures, particularly the elevated level of nontradable inflation, mean the RBNZ probably will delay cutting the official cash rate until September.

• The pattern of global growth around midyear is playing out broadly as expected. Growth is slipping to a below-trend pace, led by a downshift in Western Europe and Japan. Meanwhile, global inflation is moving sharply higher and should breach 5%oya by the end of the third quarter. Central banks' rhetoric has turned more hawkish but their response to high inflation has been limited. Since the Fed's last ease in April, central banks around the world have raised policy rates just 11bp on average.

• While recent forecast revisions are not material enough to change our broad outlook themes, they raise two important questions. The first is whether the deterioration in growth and financial market indicators signals that the global economy is sliding into recession. The answer here will most likely come from the strongest (China) and weakest (US) large economies in the near term. If our view is right, a resilient US nonfinancial corporate sector - which has successfully maintained elevated profit margins, improved its market share in global trade, and used last quarter's surprisingly strong gain in final sales (estimated at 3.1%q/q, saar) to clear out inventories - will provide the cushion to allow the overall economy to grind forward at about a 1% growth pace in 2H08.

• If a global recession is averted, attention will turn to whether the year of subpar growth we project for the global economy will be sufficient to dampen underlying inflation pressures. The answer to this question will not come soon. Our view is that global inflation and resource utilization rates will remain high and, as a result, a return to above-trend growth next spring will require a significant monetary policy response.


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