Australia and NZ- Weekly Prospects 28/7/08
Australia and New Zealand - Weekly Prospects
• Inflation pressure remained significant in Australia in 2Q, as last week's data showed. Inflation, though, should peak in 3Q, before easing back towards the RBA's target range in 2009. In a change of forecast, we now expect the RBA to cut interest rates in early 2009 - previously, we had the RBA on hold. The disinflationary impact of the weakness in domestic demand should be a more powerful force than the boost from the terms of trade. We forecast three more rate cuts later in 2009, which will take the cash rate to 6.25% by the end of the year. Retail sales and credit data this week should confirm that domestic demand continued to weaken in June, while the trade deficit should narrow.
• In New Zealand, the RBNZ cut the official cash rate (OCR) 25bp last Thursday, a close decision forecast by only four of 13 market economists. We believe the RBNZ now has embarked on what will be an extended easing cycle; we forecast a further three 25bp cuts to the OCR this year. Even though inflation will remain elevated, we expect that the RBNZ will continue to cut interest rates throughout 2009, too, which will leave the OCR at 6% at the end of 2009. The NBNZ business confidence survey this week should show a slight improvement in confidence in July, owing to heightened speculation of imminent interest rate cuts.
• The major macroeconomic development of recent weeks is the sharp slide in Western European growth momentum. After a surprisingly firm turn into the year, industrial indicators have contracted and business surveys have dived into midyear. Composite PMIs are now pointing to stagnant second-half performance in the Euro area and outright contraction in the United Kingdom, a development incorporated in recent forecast revisions. Our projections anticipated a midyear rotation in global growth whereby the US economy fared a little better while Western European activity downshifted. The magnitude of both sides of this rotation has been a surprise. While next week's US 2Q08 GDP release is anticipated to post a 2.4% gain (q/q, saar), the Euro area economy is estimated to have contracted last quarter. Stepping back, it is remarkable to observe that US GDP growth over 2007-08 is now tracking well above our expectations for the Euro area over this period.
• While the spotlight recently has been on the downshift in European growth, Japan's economy is displaying comparable weakness. Last week's reports showed that export volume contracted at a double-digit pace in 2Q. The export slide reinforced weakness in other key sectors, notably consumer spending and business equipment expenditures, to produce an expected downturn in GDP last quarter. This week's releases will help firm up our 2Q GDP estimate (-1.5%q/q, saar, released on August 13), while also giving some indication about momentum heading into the current quarter. A further slide in manufacturers' production plans (in the IP report) and in the small business survey would reinforce concerns that the economy has tipped into recession.