Australia and New Zealand - Weekly Prospects

Australia and New Zealand - Weekly Prospects

• The remarkable resilience of the Aussie labour market, and thus the Aussie consumer, continues to support our view that the RBA will hike the cash rate another 25bp in February. Indeed, inflation pressures should build throughout the year, particularly in the latter six months as labour shortages and wage pressures rear their heads once again. Some have suggested that the unemployment rate already has peaked, though we believe it will oscillate in the 5.5%-6% range near term, buoyed by the elevated labour force participation rate and the fact that many firms will rebuild reduced hours of existing staff before hiring.

•In New Zealand, the economic data flow begins to pick up this week, with the release of the 4Q CPI numbers and November retail trade survey. A rise in headline inflation (%oya) and a rebound in retail sales would reaffirm our view that the RBNZ will commence its next tightening cycle before official guidance currently suggests. We look for a 25bp hike to the OCR in March, and a series of similar rate hikes thereafter. A larger move to kick off the next tightening cycle is a risk, but a 25bp hike should suffice, as tighter monetary conditions are doing some of the heavy lifting for the RBNZ.

•Through the recession and the early stages of the recovery, there has been an ongoing debate about inflation risk against the backdrop of extreme weakness in activity and unprecedented easing by global central banks. If our forecast is correct, it will take a year or more before reflationary policies turn the tide away from slower wage and core consumer price inflation. However, the coming months are likely to produce a significant swing upward in headline inflation rates across the globe. Much of this swing reflects the commodity price rebound.

• Our economic forecast of synchronized above-trend growth incorporates substantial divergences across regions. However, the data flow has consistently pointed to even wider divergences. At one extreme, the US and Emerging Asia ended the year on a high note with momentum that is even stronger than anticipated. On the other hand, recent developments in the Euro area and Japan have disappointed significantly, raising important concerns that these economies may not deliver to our expectation of above-trend growth this year.

• The combination of strong growth and rising inflation will exert the most pressure in Emerging Asia, where policymakers already are on high alert for potential asset bubbles. China is front and centre, because of its strong economy, rapidly rising credit growth, and pivotal role in setting regional currency values. A key impediment to normalizing policy—the uncertainty about its export recovery—was likely removed last week, and the PBoC signaled change by raising the reserve requirement ratio (RRR) by 50bp. The earlier-than-expected move was also driven by growing concerns that new loan creation could spike more than expected in 1Q10. This week’s December consumer price report should show a sharp rise in inflation to 1.6%oya.

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ENDS

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