Australia and NZ - Weekly Prospects 02/02/09

Australia and New Zealand - Weekly Prospects

• Economic data in Australia last week indicated that inflation pressures eased in 4Q08. The reduced threat from inflation and soft credit conditions, combined with rapidly deteriorating conditions offshore, reaffirm our view that the RBA will cut the cash rate by a bold 100bp this week, taking the official cash rate to 3.25%. In fact, while we are sticking with our call for a 100bp cut on Tuesday, the unexpected collapse of private credit in last week's data opens the door for the RBA to move by more than 100bp. Further assertive policy easing is justified in the wake of another avalanche of gloomy news on the global economy, and further signs of instability in the global banking system. Indeed, last week, we downgraded our 2009 GDP growth forecast for Australia, owing mainly to the marked deterioration in conditions in Australia's dominant trading partners in Asia. We now expect the Aussie economy to contract 0.5% this year—previously, we expected a small rise in GDP.

• The RBNZ delivered another massive 150bp cut to the official cash rate last week. The OCR now has been lowered a mammoth 475bp since last July. The aggressive action by the RBNZ certainly was warranted. The Kiwi economy is well entrenched in a recession that, on our forecasts, will likely extend for six straight quarters. Only further monetary and fiscal policy stimulus will prevent a deeper economic downturn. This week, data should show that labour market conditions deteriorated further in 4Q, with the unemployment rate rising 0.5 percentage point to 4.7%. Additional job insecurity and redundancies will mean that workers continue to curb spending, weighing even further on the economic growth outlook.

• Any relief from last week's news of an unexpectedly moderate -3.8% slide in 4Q08 US GDP was offset by a string of other disappointments on year-end activity. Industrial activity collapsed across the globe last quarter at an estimated 20% annualized pace, yet firms did not make significant progress in reducing inventories. In the US, final sales declined at a 5.1% pace last quarter and there was a modest buildup in stocks, concentrated in the durable goods sector. In Japan, manufacturing inventories rose at a 15%ar pace despite a 40%ar drop in output. Clearly, efforts by firms to scale back will intensify. Last week's reported rise in unemployment in Japan and Germany is a sign that job shedding is now gathering steam globally. This week's US January payroll report is expected to show a third straight month of job losses exceeding 500,000.

• Against this backdrop, we are looking for global GDP to decline at about a 5% annualized pace this quarter, an outcome in line with last quarter. With financial markets having largely digested the news that a severe global contraction is set to persist, the key element of our forecast is the projected swing toward stability in global growth around midyear. The case for stabilization relies on credit market healing and on cushions from policy stimulus and lower energy prices stabilizing household demand even as business adjustments accelerate.

Weekly020209.pdf

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