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Australia and NZ - Weekly Prospects 1 Dec 08

• The slew of economic data scheduled for release in Australia this week will be overshadowed by the RBA policy announcement Tuesday afternoon. Our forecast calls for the RBA to cut the cash rate 75bp - the dominant risk is for a smaller move, owing to the additional steps put in place to stabilize global markets and lingering anxiety over inflation. In our view, an acceleration in the pace of monetary easing this month to the 100bp priced into futures markets risks the RBA endorsing the gloomy pall still hanging over markets. The near-term imperative for RBA officials is to ensure the policy lever points to "easy" as quickly as possible - we are not there yet. The avalanche of economic data this week includes 3Q GDP, October retail sales and building approvals, and the 3Q current account deficit.

• We forecast that the RBNZ will cut the OCR 100bp, but the risk there is for a larger move. Either way, a significant cut in the cash rate is warranted. The recent softness in retail spending, the sharp rise in the jobless rate, and further signs of weak consumer and business sentiment have reaffirmed our view that the economy is in the midst of what might turn out to be a prolonged recession. The economy already has contracted for two straight quarters and, in our forecasts, GDP should decline for at least another three. Falling house prices and job losses make the outlook for already weak household spending particularly bleak.

• Economic reports continue to beat the drum of a deep and synchronized global downturn. Industrial activity readings are pointing towards the first double-digit annualized decline in global manufacturing output since the mid-1970s. And last week's key national November business surveys - including a collapse in Germany's Ifo and Japan's Shoku Chukin - should combine with a further slide in the US ISM survey tonight to reinforce the message that business confidence is approaching a three-decade low as the quarter ends. With indicators pointing to an intensifying global adjustment in employment and business spending, our forecast of the deepest four-quarter GDP slide in the developed world since WWII appears to be on track.

• While the monetary policy gap may be set to narrow, the contrast in central banks' use of their balance sheets is getting larger. All central banks have expanded their balance sheets since September to compensate for the collapse in interbank activity. But the pace of expansion of the Fed's balance sheet has been truly dramatic, while the ECB and BoE's balance sheets have grown more modestly. This contrast became even more striking last week with the announcement that the Fed would purchase an additional $800bn of mortgage and other consumer securities. When these facilities and other commitments are fully utilized, the Fed's balance sheet will expand beyond $3 trillion - more than tripling in size since August. In contrast, the ECB's balance sheet has grown by around 40%.


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