Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• There was little economic data released in Australia last week, although the RBA monetary policy minutes from the May board meeting provided market pundits with plenty to chew on. It now seems more likely that the rapidly rising terms of trade and recently delivered income tax cuts may prevent the further significant easing in domestic demand that RBA officials expect to help curb inflation. This raises the risk that the RBA may yet have to raise the cash rate again. Other data showed an improvement in consumer confidence in May following the Federal Budget. This week, credit growth should have slowed in April and capital spending intentions probably will be scaled back slightly owing mainly to credit market problems and diminished confidence in the resilience of the global economy.

• In New Zealand, the calendar was also light on key data last week; the Federal Budget was the highlight. The unexpectedly large income tax cuts and increased government spending will likely prevent the RBNZ from easing monetary policy in coming months. Today, data showed the trade balance in deficit in April for the second straight month as imports were bolstered by one-off items. Later in the week, data should show business confidence remained subdued in May.

• The latest indicators, on balance, reinforce our "less growth, less fear" outlook theme. A broad-based slowing in global growth appears to be taking hold following a surprisingly resilient growth outcome during 1Q08. The growth of global manufacturing output is stalling as we move toward midyear. US and Japanese output is now contracting while EM production gains are downshifting. Meanwhile, May business surveys reinforce the view that the Euro area economy is moving into a phase of subpar growth, even as a pronounced rotation in growth is under way toward Germany. At the same time, the broadening out of the growth slowdown is not producing intensified weakness in the US. The message from high-frequency indicators is that the US economy continues to limp slowly forward as business cutbacks remain mild, and as financial stress gradually abates. Combined with the beneficial effects of the tax rebate checks now in the pipeline, the risk of a protracted recession has declined.

• As the risk of a slide in the US economy declines, inflation is becoming a more pressing concern for much of the globe. Global consumer prices rose 4% in the 12 months through April, the most rapid rate of increase since 1999. Emerging market inflation has moved up far more dramatically—by more than three percentage points since early 2007, to 7.6%oya. While there are good reasons to look at the spike in headline inflation as a relative price movement reflecting food and energy price gains, there are increasing signs also of passthrough from rising commodity costs to other prices.

See... AusNZ_weekly_26May08.pdf

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