Australia and NZ - Weekly Prospects 11 Aug 08
Australia and New Zealand - Weekly Prospects
• The highlight in Australia last week undoubtedly was the commentary accompanying the RBA's decision to leave the cash rate unchanged. The dovish tone of the RBA's statement signaled clearly that the RBA will ease policy soon. We look for a 25bp rate cut in September, and another 25bp rate cut before year-end. Evidence continues to build showing that the Australian economy quickly is shedding momentum, with employment growth slowing and home loans falling again. Data this week should show that wage growth remains contained, but that consumer confidence rebounded owing to falling petrol prices and speculation that the RBA is poised to cut interest rates. Today's RBA quarterly statement is the highlight this week - the market wants guidance on whether the first rate cut will be 25bp or 50bp.
• In New Zealand, labour market data last week confirmed that wage growth remained contained and that employment rebounded in 2Q. That said, the moderation in economic growth probably will lead to further softening in the labour market which will weigh on consumers already facing significant headwinds; this is likely to be evidenced by retail sales data on Friday, which should show a second quarterly contraction in 2Q (-1.9%q/q).
• The global economic slowdown has both broadened and intensified through the middle of the year. This week's GDP releases should confirm that the Euro area and Japan contracted last quarter and the latest indicators suggest that neither of these economies will expand this quarter. Emerging market economies are also cooling materially, a point likely to be highlighted by this week's release of key July Chinese data. With this week also likely to reinforce the message of a US downshift following a solid 2Q08 outcome - notably with a decline in July retail sales - the first period of subpar global growth since early 2003 is now becoming well established.
• The close linkages between economies should also be recognized, a point that underscores the heightened state of concern we now maintain about the global outlook. With downward momentum in Europe and Asia intensifying and the US consumer turning weak, the global economy faces an elevated risk of experiencing a negative feedback loop that produces a recession. Downward pressures are at their most intense right now and, if a recession outcome can be avoided, the prospects for a growth recovery in 2009 look good - against the backdrop of fading drags from oil, inventories, and US housing.
• The deterioration in the global growth outlook will, along with falling oil prices, have important implications for monetary policy. However, the fall in headline inflation will likely be gradual and policymakers in most countries already maintain relatively accommodative stances. This implies relatively little policy easing ahead even as global growth remains below par through the rest of this year.