Sunday, July 26, 2009

Australian & New Zealand Weekly : Revised Forecasts - Technical Recession Averted ( AUD )

Week beginning 27 July 2009

  • Australia: Revised forecasts - technical recession averted.
  • RBA Governor: "Challenges for Economic Policy".
  • Australian data: dwelling approvals, credit.
  • RBNZ OCR review: no move, may drop easing bias.
  • New Zealand data: trade, building consents, business survey.
  • US Fed : Bernanke, Beige book.
  • US data: Q2 GDP, durable goods, manufacturing & housing updates.
  • Key economic & financial forecasts

We have revised our growth forecasts. While the changes are not major they are significant in that we are no longer forecasting a technical recession.

We assess that the signals from the Australian economy in the last few months necessitate a less pessimistic growth forecast. We have identified the following factors that we expect will be instrumental in moderating the slowdown in the Australian economy. We summarise our changes in the attached charts. Note that we now expect year average growth in GDP in 2009 to be 0.2% compared to our previous forecast of minus 0.6%. For 2010 we expect growth of 1.8% compared to 1% in our previous forecast.

These might seem to be minimal changes but because GDP growth switches from positive to negative and our quarterly profile changes from three consecutive negative quarters (Q2; Q3; Q4) to only one (Q3) the technical recession label (two consecutive negative quarters) is no longer appropriate.

We do not believe that these changes are sufficiently material to change our rate or currency views.

Reasons behind our upward revisions are:

1) Critically, we saw a sharper than expected fall in export prices (21%) in the second quarter - we are aware of export values for April and May and our estimate for June values now suggests that export volumes for Q2 will increase by 1% rather than contract by 2%. We estimate that will mean that net exports will add 0.3% to growth rather than subtract 0.3% pushing our Q2 GDP estimate to 0.2% from minus 0.4%. The upward revision to net exports plays a significant part in our overall revision to growth in 2009. However, a word of caution - that was the biggest fall in export prices since the series began in 1974 (second largest decline was 6.5%) and therefore indicates extreme volatility in the net export/inventory/statistical discrepancy mix.

2) Both business and consumer Confidence have increased to their highest levels since December 2007. While these spectacular recoveries in Confidence are likely to prove fragile and can potentially partly retrace we expect that Confidence will establish higher base levels than we had feared earlier in the year.

We also believe that it is difficult to envisage events that could see Confidence plunging to levels prevailing earlier in the year. We remain very sceptical about the outlook for the major economies and anticipate ongoing problems with the financial systems of both US and Europe. But these developments will mainly affect the pace of growth in these economies rather than providing dramatic signals that would jolt Confidence in the way we saw earlier this year.

Households still have to negotiate the upcoming 6 month period in which nominal incomes will be contracting as hours worked fall; government handouts cease and interest rates are on hold rather than declining. However, we assess that households have been successful in saving a decent proportion of the cash handouts - one bank reports that 90% of those folks with owner occupier mortgages have opted to pay down debt rather than reduce interest payments.

We expect that as Confidence levels remain relatively high households will be prepared to reduce savings to maintain expenditure levels even as incomes contract. When Confidence is low households are likely to seek to maintain savings at the expense of spending - as we are seeing in the US but contrast the level of Australia's Consumer Sentiment Index (109) with the US (66). That observation has prompted an increase to our consumer spending profile increasing growth over 2009 from 1.3% to 1.6%. In 2010 we have raised spending growth from 2.0% to 2.3%.

Higher than expected Business Confidence will also moderate the downturn in business investment. That will mainly affect plant and equipment since we expect non-residential property and engineering investment will be largely driven by exogenous events (credit availability; external demand; government spending). We have revised the expected downturn in plant and equipment to minus 18% from minus 22% in 2009; and from minus 7% to minus 1% in 2010.

3) Finally, we have increased the strength of the recovery in housing construction. New lending for housing construction continues to surge - number of new loans for housing construction (owner occupied) is up 60%. That will eventually see strong positive prints on housing construction. We have raised the growth forecast for housing construction in Q4 from 2.5% to 4% and through the year growth in 2010 in housing construction to 23% from 19%.

While the "debate" about recession is occupying great coverage in media and official circles these forecast changes are significant in that they indicate that Australia may now avert a technical recession. That is our current best estimate but please respect the particularly challenging forecasting task stemming from unprecedented fluctuations in commodity prices; fiscal settings; monetary policy; global growth; and currencies.

Australia: Data Wrap


  • Q2 Final Stage PPI inflation was well below consensus at -0.8%qtr (consensus -0.1%, Westpac -1.2%), almost halving the annual rate to 2.1%yr from 4.0%, the lowest since 2004Q1.
  • Non-core elements subtracted slightly more from the PPI than expected, with weaker than expected food prices (fell 1.2%, subtracting 0.21ppts) but a larger than expected rise in petroleum refining prices (+4.9%, adding 0.11ppts), giving a net 0.10ppt subtraction from the quarterly PPI.
  • The 1.2% fall in food components builds on a 0.9% fall previously. While CPI food prices are not well correlated with PPI equivalents, the back to back falls in PPI food prices affirm our forecast of much tamer Q2 CPI food prices (our f/c is +0.3%qtr vs +2.2%qtr prev).
  • Ex-food and petroleum, the core PPI was very weak as we expected, courtesy of the stronger AUD cutting import prices. The core PPI was -0.9%qtr (weakest on record since 1998) slowing the annual rate to 3.4%yr (lowest since 2008Q1) from 5.2%yr previously.
  • With the AUD import weighted TWI up 10.2%qtr in Q2, the core imports PPI was -6.2%qtr.
  • Building construction prices continued to fall in aggregate (-0.5%) despite a bounce in house construction prices, weighing on the core PPI in addition to the import drag. Abstracting from these, domestic core pressures rebounded amidst firmer demand, but not enough to prevent a further fall in the annual rate. The domestic core PPI ex-construction & utilities was +0.7%qtr (vs -0.3% prev), slowing annual growth to 2.5%yr from 3.0%.
  • With improved new housing demand led by FHB's, house construction output prices rebounded 1.4%qtr (vs -0.5% prev).


  • Annual headline inflation falls below RBA target band courtesy of dropping out of strong 1.5%qtr from 2008Q2, and subdued 2009Q2 courtesy of pullbacks in food prices and further falls in bank interest rate margins (deposit and loan facilities -4.3%qtr vs -14.1%qtr prev).
  • Average RBA underlying CPI came in above consensus as we expected, at +0.8%qtr, allowing only a gradual slowing in annual underlying inflation to 3.9%yr from 4.2%yr previously.
  • Notably stronger than expected rebounds from New Year Sales discounted prices in several areas of discretionary retailing, reflecting recent strength in household demand, including clothing & footwear, furniture & furnishings, and household appliances, utensils & tools. This is acting to keep the slowing in annual underlying inflation very gradual.
  • We don't expect that these numbers will come as any surprise to the Reserve Bank. Their most recent forecast for underlying inflation to June 2009 is 3.75%yr and this number prints at 3.8%yr. Their forecast for headline inflation is 1.5%yr, the same as today's result.
  • However the stronger rhetoric from the Bank since on May 8 it released its somewhat controversial forecast that inflation will drop to 1.5% by June 2011 suggests a decent case for that forecast to be revised up to say 2% when we see the revised forecasts on August 7. With a less pessimistic forecast the obligation to consistently refer to cutting rates will be eliminated. Markets would be quite surprised if that terminology no longer appears in RBA rhetoric but we do not believe that it would mean the Bank is near to tightening.

Round-up of local data released last week

Date Release Previous Latest Mkt f/c
Mon 20 Q2 PPI -0.4% -0.8% -0.1%
Tue 21 Jul RBA meeting minutes - - -
Jun new motor vehicle sales 5.4% 5.7% -
Wed 22 Q2 headline CPI 0.1% 0.5% 0.5%
Q2 avg RBA underlying CPI 1.1% 0.8% 0.75%
RBA Assistant Governor Debelle speaking - - -
Thu 23 RBA Assistant Governor Debelle speaking - - -

New Zealand: Week ahead & Data Wrap

Out of the frying pan

RBNZ Governor Bollard's speech on 14 July, simply titled "Economic Recovery", gives a clear indication of what to expect from next Thursday's OCR review.

Compared to the June Monetary Policy Statement, the RBNZ appears more confident that the global economy is stabilising and that New Zealand is entering the recovery phase; the main question now is what form the recovery will take. But with the prospect of recovery comes a growing concern that households could revert to their previous "borrow and spend' ways - and keeping interest rates too low for too long would clearly fuel that risk.

The change in the world growth outlook is perhaps the most significant factor for the RBNZ. Consensus Forecasts for growth in New Zealand's trading partners have been revised up in the last two months to -2.1% for 2009 and 2.2% for 2010, an increase of 0.2% for each year. That's a modest improvement so far, and still points to weak activity over the next couple of years. But it's increasingly likely that the "Depression Mark II' scenario that was feared earlier this year has been avoided.

In recent statements the RBNZ have made a point of undercutting Consensus forecasts, partly on the expectation that there would be further downward revisions closer to the date; their June projections assumed growth of -2.6% this year and 1.4% next year. But the gap versus Consensus is now widening, and the risk is that the RBNZ will need to make a significant leap to catch up. The tone of Dr Bollard's speech certainly suggests a more positive view on the world economy compared to June.

Locally, the data continues to suggest a gradual recovery. Consumer and business confidence have held their recent gains, retail spending has been a little stronger (though probably less so in terms of volumes), house sales are running at a stronger pace than a year ago and prices have stabilised. These factors have all been underpinned by low interest rates and stronger net inward migration. Notwithstanding the unknown impact of H1N1 influenza (which both we and the RBNZ assume will be small), we expect the economy to return to mildly positive growth in the current quarter.

On the downside, the New Zealand dollar remains at unhelpfully high levels. The trade-weighted index is tracking about 5% higher than the RBNZ's June projections, although the RBNZ did accept that there was likely to be some short-term strength, before the market began to focus again on New Zealand's large external financing requirements. And at the risk of reading too much into Dr Bollard's speech, the RBNZ's concern now seems to be that the stronger currency could cause the recovery to be lopsided, rather than stifling it altogether as suggested in earlier statements.

The RBNZ's view in June was that households will continue to borrow less and save more in order to strengthen their balance sheets. But they also offered an alternative scenario, in which households resume borrowing and spending, spurred on by rising house prices, while a stronger NZD depresses the export sector. In the longer term, international investors could demand higher interest rates in order to keep funding New Zealand's spending spree. The focus in Dr Bollard's speech on improving domestic savings behaviour suggests that this "alternative' scenario is increasingly becoming a central concern.

But there's an implicit assumption here: that households will have an incentive to return to their "borrow and spend' ways as the economy recovers. Renewed house price inflation and falling savings rates would be a sure sign that interest rates are too low - which is clearly something that the RBNZ could remedy. Indeed, we think that Dr Bollard's speech was the first step in preparing the market for the unpleasant fact that one way or another - whether it's through OCR hikes, greater use of prudential regulation, or market forces - interest rates are going to be higher in coming years.

But that's an issue for the longer term. For now, the RBNZ's focus is on supporting the economy through a period of weak activity, and with inflation pressures muted, there's no urgency to hike rates any time soon. But with the downside risks to the economy diminishing, we expect next week's statement to drop the line that "the OCR could still move modestly lower over the coming quarters" - no great sacrifice, since the RBNZ's 90-day rate projections in June already implied no further cuts as their central view, and market pricing implies only a 15% chance of another cut in this cycle.

That leaves the RBNZ's expectation that they will "keep the OCR at or below current levels until the latter part of 2010". If the pace of the global recovery continues to surprise the RBNZ in coming months, that expectation could soon become untenable. But we think they will retain this statement for now (without the "or below"), as they may be concerned that ditching it so soon could elicit a sharp jump in interest rates and the exchange rate.

The local data calendar gets busy ahead of Thursday's OCR review. We expect the June trade balance (Tues) to remain in surplus, though less impressively than in recent months, due to softer dairy export prices and a gradual pickup in import demand. Building consents (Wed) may be lower in June, due to the volatile apartment component, but we expect the trend to improve over this year as rising net migration exacerbates an emerging shortage of housing. Finally, business confidence (Wed) is expected to close to its recent highs, with most sectors (aside from agriculture) reporting early signs of stabilisation in recent months.

Round-up of local data released last week

Date Release Previous Latest
Tue 21 Jul Jun external migration ann. 11,200 12,500
Jun credit card transactions -0.4% 0.2%

Data Previews

Aus Jun dwelling approvals

Jul 30, Last: -12.5%, WBC f/c: 9.0%

Mkt f/c: 8.0%, Range: 3.0% to 11.5%

  • May dwelling approvals were much weaker than expected, dropping 12.5% after a 21% recovery in the previous 3 months. Weakness was mainly in private units (incl apartments), which plunged 43.6%, the biggest fall on records back to 1983. Although this segment is famously volatile the scale of the pull back suggests funding difficulties are again influencing activity. The RBA also noted weakness ex capital cities attributed to weaker demand for holiday units (Gold Coast etc).
  • That said, demand for new housing is clearly rising strongly. Finance approvals for the construction & purchase of newly built dwellings are up 60% from mid-2008 lows. We expect this to overwhelm the effects of credit problems in June, with a 9% bounce in approvals forecast. Indeed, there is significant upside risk if the May figure turns out to be mostly a rogue.

Aus Jun private credit

Jul 31, Last: -0.1%, WBC f/c: flat%

Mkt f/c: 0.1%, Range: 0.0% to 0.4%

  • Private credit declined fractionally in May as business contracted for a fourth consecutive month and more than offset a 0.5% rise in housing credit.
  • The positive is that an upswing in housing finance (new lending) is supporting growth in the stock of housing credit. However, existing mortgage holders paying down debt more quickly is providing an offset.
  • Business credit (representing a little less than 40% of total credit) is contracting, declining by 2.3% over the last six months. The downturn has some way to go and we expect a further decline in June. That said, the recent rebound in business confidence is encouraging.

NZ Jun merchandise trade NZDm

Jul 28, Last: 859, WBC f/c: 200

  • The merchandise trade balance has moved aggressively into positive territory over the past few months. Expenditure on imports has plunged as demand for consumer durables, especially cars, has dried up. By contrast, export receipts have held up as commodity prices have ceased declining, and local production conditions have been solid.
  • We predict the first June surplus since 2002. The predicted surplus is not as strong as recent months, even after allowing for seasonal factors. Rising retail sales suggests consumer imports will be recovering, and car imports have lifted off their base.
  • On the export side, international dairy prices fell in June, and the higher exchange rate will have reduced NZD-denominated returns for many exporters.

NZ Jun building consents s.a.

Jul 29, Last: 3.5%, WBC f/c: -4.6%

  • Dwelling consents posted another solid gain in May, but with just over 1,200 consents being issued per month, the number of new homes being built is still well below that required to keep pace with population growth.
  • As such, we expect a solid lift in ex-apartment consents in June (+4.0%), and see risks to the upside. However, unless consents for the more volatile apartment component keep pace with May (at 275), the overall number of consents is likely to decline.
  • The trend in non-residential consents declined for the ninth consecutive month in May, although in unadjusted terms consents growth remains strong, up 35% on a year ago. Business confidence surveys continue to point to weakness in non-residential building over the remainder of this year, but it remains to be seen how much of the slack will be picked up by the government sector.

NZ Jul NBNZ business confidence

Jun 29, Last: 5.5%

  • Headline confidence improved further in June, reaching a seven-year high. Confidence in the agricultural sector fell on concerns about lower dairy payouts, but all other sectors moved into net positive territory.
  • We expect a similar outcome in the July survey. Recent commentary about the dairy industry will have done little to improve sentiment, but retail, manufacturing and services have each shown recent signs of stabilisation. Construction in particular is benefiting from increased housing demand and infrastructure spending.
  • The own-activity measure is a useful indicator for current quarter GDP. An unchanged read would be broadly consistent with our forecast of 0.2% growth in Q3.

NZ RBNZ OCR review

Jul 30, Last: 2.50%, WBC f/c: 2.50%, Mkt f/c: 2.50%

  • The improving outlook for the global and domestic economies means the RBNZ will again leave the OCR unchanged at 2.50% next week.
  • The RBNZ is becoming more concerned about a return to debtdriven consumption as the economy recovers, which suggests that they no longer see further interest rate cuts as appropriate.
  • While the high NZ dollar remains a bugbear for the RBNZ, recent commentary suggests they now see the risk of a lopsided recovery rather than a stifled one.

US June new home sales

Jul 27, Last: -0.6%, WBC f/c: 6.0%

  • Across a range of indicators, the US housing market is showing signs of stirring, after four years of decline (new home sales peaked in July 2005!). The upswing in pending and finalised existing home sales is largely due to the distressed sale of foreclosed properties at knock-down prices, but homebuilder confidence and new housing starts and permits are also moving higher.
  • We are particularly impressed that single family home starts have not posted a monthly decline since January, and are up a cumulative 32% over the latest four months. Given the still large glut of unsold new and established dwellings, the risk is that this upswing won't be sustained, but in the short-term at least, it's likely that higher sales have been a driving factor.
  • Hence we expect new home sales to jump 6% in June.

US regional factory surveys for July

Jul 27, Dallas Fed: Last: -20, WBC f/c: -10

Jul 28, Richmond Fed: Last: 6, WBC f/c: -2

Jul 31, Chicago PMI: Last: 39.9, WBC f/c: 44.0

Jul 31, Milwaukee NAPM: Last: 50, WBC f/c: 48

  • These surveys have been a big part of the cliched "green shoots of recovery" story that first emerged in March. The Richmond Fed survey has been in positive territory (>50) for two months running, and the private sector Milwaukee NAPM improved dramatically in March-June, just touching 50. The others have lagged behind somewhat, but all are stronger in trend terms, consistent with a much slower pace of industrial contraction.
  • Thus far for July we have seen the New York Fed which rose from -9 to -1 and the Philly Fed which fell from -2 to -8 after soaring 20 pts back in June. These results suggest the other regionals should all keep trending higher, though the strongest two (Richmond and Milwaukee) may temporarily correct lower.

US June durable goods orders to correct lower

Jul 29, Last: 1.8%, WBC f/c: -1.5%

  • Durable orders posted back to back 1.8% gains in April-May, the first consecutive rises in orders since mid 2008, adding to the body of evidence pointing to a stabilising economy. Core capital goods orders (ie ex defence and aircraft) were especially strong, as were defence orders.
  • The prospect of a third straight orders gain in June is not strong, with both core capital goods orders and defence likely to correct lower. The orders component of the factory ISM switched from a gain in May to a fall in June, adding to the case for a correction lower. Also Boeing received 20 orders for new aircraft in both May and June, but those in May were of higher value, adding to the downside risk in the June report.
  • Putting all this together we expect June orders to fall 1.5% keeping the recent trend just barely positive.

US Q2 GDP advance: slower pace of contraction

Jul 31, Last: -5.5% annualised, WBC f/c: -2.0%

  • US GDP plunged at around a 6% annualised pace in Q4 and Q1, but a string of less weak survey and partial data since March has pointed to a much slower pace of contraction in Q2 and, looking ahead, modestly positive growth in Q3 is achievable if recent trends continue.
  • We expect a 2% annualised contraction in Q2, driven mainly by a renewed but modest fall in consumer spending; much less steep falls in both housing and business investment; continued inventory rundown (setting up a positive Q3 stocks contribution) but another positive contribution from net exports.
  • The Q2 report will also include historic revisions. As the data stand, prior to Q2 there were contractions in the three qtrs Q3 2008-Q1 2009, and also Q4 2007, but that profile could change substantially in these once a year revisions.

Westpac Institutional Bank


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