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Australia and NZ - Weekly Prospects 29/09/08

Australia and New Zealand - Weekly Prospects

In a quiet week for data in Australia, the onset of the global financial market turmoil intensified the downside risks to the domestic growth outlook. This means that, in a change of forecast, we now expect the RBA to cut the cash rate 25bp on October 7. Previously, we had expected the RBA to wait until December before cutting the cash rate again. Auto sales fell for the second straight month as discretionary spending continued to contract. The Aussie data flow resumes in earnest this week, though, with data on credit, retail sales, building approvals, and the trade balance scheduled for release.

• The highlight of the Antipodean economic calendar last week was New Zealand's gloomy 2Q GDP data. The Shaky Isles look even more shaky than before because it now is official; the economy entered recession last quarter. In fact, GDP contracted 0.2%q/q after a similar contraction in 1Q. The downgrade to the global economic outlook owing to the latest round of financial instability means the RBNZ now probably will cut the OCR 50bp in October, instead of the 25bp we forecast previously.

• As the US slips toward contraction the spectre of a global recession looms larger. Certainly the economic news from Western Europe points in that direction. The sharp declines in Euro area business surveys in recent months challenge our forecast that the economy will stagnate rather than contract in coming quarters. The September composite PMI dipped to its lowest level since late 2001. Moreover, a number of other important surveys have moved into territory similar to the start of the deep early 1990s downturn.

Another key issue is what happens in Japan. The economy contracted last quarter, but the recent indicators have shown tentative signs of stability, consistent with our view that the recession will be shallow, as the terms of trade improve with the recent fall in commodity prices. Much will depend on the trajectory of exports. But the pace of corporate adjustment and its feedback on domestic demand are also key, as elsewhere. This week's October Tankan and September Shoko Chukin surveys will shed light on corporate activity.

• Whether the global economy slides into recession is likely to be determined by the fate of the emerging market economies. Consistent with revisions to the US, we have significantly lowered our EM growth forecast for the coming quarters. However, the projection of a growth bottom at around 4.5% would represent a far better performance for the group than was recorded during the last US recession. Important support should come from China, where falling inflation and a prompt shift toward policy stimulus is expected to help sustain domestic demand. Demand remains strong among some of the major commodity exporters as well.


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