ANZ Australian Economics Weekly

Transcription

1 ANZ Australian Economics Weekly Weaker now, stronger later 30 May 2008 Inside: Economic update...2 Data previews...4 Market wrap...5 ANZ Forecasts...7 Contacts...9 Authors: Warren Hogan Co-Head of Australian Economics and Interest Rate Warren.Hogan@anz.com Sally Auld Co-Head of Australian Economics and Interest Rate Sally.Auld@anz.com Katie Dean Senior Economist Katie.Dean@anz.com Riki Polygenis Economist Riki.Polygenis@anz.com Dr. Alex Joiner Economist Alex.Joiner@anz.com Patricia Gacis Strategist Patricia.Gacis@anz.com Phillip Hawkins Graduate Analyst Phillip.Hawkins@anz.com Our Vision: For Economics & Markets to be the most respected, soughtafter and commercially valued source of economics and markets research and information on Australia, New Zealand, the Pacific and Asia. Economic Update We have reviewed our economic and financial forecasts this week. We now expect economic growth and inflation to remain higher for longer. We believe this will prompt the RBA to raise interest rates at least once and probably twice in the second half of this year. Higher yields are likely to send the Australian dollar through parity with the US dollar. Next week s GDP data will be soft, with growth affected by weak consumer and business spending and a huge detraction from net exports. However we are not confident that this slowing in activity will be sustained. Australian businesses remain bullish on their medium-term prospects and are still prepared to make substantial capital expenditures despite rising interest rates, a high currency and increased economic uncertainty. This will help underpin a pickup in economic growth later this year. Market wrap Markets are virtually fully priced for a 25bp RBA rate hike by August. The AUD continues to outperform on the crosses, with the AUD/JPY near an 8- month high and the AUD/GBP trading at just under a 10-year highs Oil prices continue to sour sentiment in equity markets. Chart of the week Even worst case investment intentions look healthy Annual % ch Source: ABS, ANZ (f) (f) Expectations using 5yr realisation ratio Expectations using historically low realisation ratio ANZ forecast

2 Warren Hogan Co-Head of Australian Economics and Interest Rates Warren.Hogan@anz.com We have reviewed our economic and financial market forecasts this week The Q2 CPI will be a nasty combination of broad based inflation pressure as well as a number of individual items rising significantly Economic Update We have reviewed our economic and financial forecasts this week. These include higher interest rates and a higher currency as well as stronger growth and inflation in the short-term. Our key forecast changes are: Non-farm GDP growth is forecast to be 2.0% as at December Factoring in two rate further rate hikes in 2008 we now have non-farm GDP troughing at 1.6% in the middle of With interest rates likely to remain restrictive for an extended period, the recovery in domestic economic activity will be modest. We expect domestic demand to be 2.3% in 2009 and to rise to 3.1% in To successfully ease inflation pressures within the Australian economy a prolonged period of soft domestic demand is required. Core inflation in Q2 has been revised from 1% to 1.3%. The peak in annual core inflation is expected to be 4.9% in Q3 2008, up from 4.5%. Factoring in two further rate hikes in 2008, we are expecting inflation to be back within the target band by mid The unemployment rate is expected to remain below 4.5% in 2008 before rising to 5% by By historical standards, a rise in the unemployment rate of 1ppt through the course of a cyclical downturn in the economy is modest. The RBA cash rate to peak at 7.75% over the second half of The first reductions in the cash rate are unlikely to occur before the second half of The speed of easings in 2009/10 will be dependent on the extent of slowing in the domestic and global economies evident over the year ahead. The Australian dollar is forecast to rise to US$1.04 in Higher domestic interest rates, improving global risk appetite and strong export prices (and earnings) will support further gains in the currency. Term rates to peak in the next few months. The 3-year swap rate should reach 7.95% in September Core inflation to peak closer to 5% As was the case in Q1, we expect the Q2 CPI to be a nasty combination of broad based inflation pressure, stemming from higher input prices, as well as a number of individual items rising by a large amount. Input prices have been rising rapidly (as reflected by the 1.9% increase in the final producer price index last quarter). Unless firms allow some margin compression, this could see a faster rate of growth in a range of CPI items this quarter. Survey measures are already pointing to an increase in business selling price expectations. Specific drivers adding to inflation in the quarter include petrol, which if unchanged for the rest of the quarter, looks like rising 5%-7% (adding around 0.2/3ppt to the headline CPI). Airfares could be up around 5%, adding 0.1ppt as the second-round effects of higher global fuel prices comes through. Rents will add another 0.1ppt consistent with record low vacancy rates. We should also see another solid rise in food prices (+0.2ppt) stemming from surging global agricultural commodity prices and higher transportation costs. Higher excise on alco-pops will add another 0.05ppt. And finally, the average 5% increase in private health insurance premiums this quarter is also likely to add 0.15ppt. With so many large CPI items rising by more than the underlying inflation pulse, then inevitably they cannot all be trimmed out of the core figures. The result is a high rate of both headline and core inflation. Our preliminary forecast for Q2 core CPI is 1.3% (headline at 1.2%), taking the annual rate to 4.6%. The six month annualised rate will be over 5%. Some indicators are telling us the risk is for an even higher number. The monthly results for the TD-MI inflation gauge show the trimmed mean up 0.6% in March and Page 2

3 0.6% in April. Quarterly arithmetic suggests that if May and June are up 0.3% then the quarterly increase will be 1.4%. Although we are only just over half way through the quarter, the information we have to hand suggests the risk of another upside surprise in Q1. ANZ CPI forecasts year average ANZ forecasts Percent year average 0.0 Mar-87 Apr-90 May-93 Jun-96 Jul-99 Aug-02 Sep-05 Oct-08 Business spending is expected to be strong over the year ahead Business investment plans for remain robust GDP figures to be released next week point to weak growth in Q1 but we expect a pick up later in the year Australian businesses remain bullish on their medium-term prospects and are still prepared to make substantial capital expenditures despite rising interest rates, a high currency and increased economic uncertainty. This week s ABS survey of investment intentions shows that businesses have actually revised up spending plans for in the March quarter. If 5-year average realisation ratios are applied, the survey implies a 24% rise in investment spending next year, up from the 23% estimate recorded last quarter. This follows expected growth of around 12% this year. To be sure, a lot of this strength is coming from mining, with this sector forecasting CAPEX spending to surge by around 38% next year, a slight upgrade from last quarter. If we exclude mining, we see that investment spending intentions have been revised down slightly from last quarter, but are still up a strong 15%. This is the strongest estimate of investment intentions for the nonmining sector since Significantly, the strength in non-mining investment intentions for is broadly-based and includes the more interest-rate sensitive sectors of the economy. Construction (+45%) and transport and storage (+45%) are leading the way, followed by retail trade (+30%) and property and business services (+18%). In contrast, the triple-whammy of higher interest rates, weaker demand and record oil prices has kept investment intentions flat in the manufacturing sector. GDP growth will be weak.but we knew that! Our projection for next week s GDP is for a small 0.1% rise in the March quarter. Weak consumer and business spending and a huge detraction from net exports point to very little growth in the quarter (see preview page 6). For the financial markets, policymakers and indeed private businesses, this is the past. The future is what matters. On this we are not confident that the slowing in activity evident in Q1 will be sustained. One of the hallmarks of the Australian economy over the past three years has been its ability to absorb rises in interest rates. The economy slows in response to higher rates, adjusts, then starts to expand once again. We have witnessed this in 2003, 2005 and This atypical macro economic behaviour is hard to explain, Page 3

4 but we think the commodity boom and the subsequent fiscal policy response provide much of the answer. Riki Polygenis Economist riki.polygenis@anz.com Over recent years the negative impact on disposable incomes and cash flows of higher interest rates has been offset by tax cuts. This may well turn out to be the case in The substantial tightening in financial conditions from November through March has clearly impacted consumer spending and personal credit growth. As noted, our revised forecasts for the economy imply that we believe that strong export incomes and tax cuts will once again see the economy weather tighter financial conditions over the year ahead. Key data summary Key points to note from this week s economic data releases are: The total volume of construction work done rose by 2.3% in Q1, underpinned by a 9.5% rise in engineering construction. Building construction was flat in the quarter, with a rise in residential building (+0.3%) offset by a fall in non-residential building (-0.5%). Private new capital expenditure (CAPEX) fell by 2.5% in Q1 following a 7.3% increase in Q Equipment, plant and machinery expenditure fell the most (-2.6%) although buildings and structures expenditure also eased (-0.8%). Looking forward however, firms remain optimistic about their medium-term prospects, with investment intentions for revised up to an increase of 24% (in nominal terms). Private sector credit growth moderated to 0.4% in the month of May to be 14.1% higher over the year. Personal credit was flat, business credit rose by just 0.1% and housing credit growth slowed to 0.7% with credit to both investors and owner-occupiers slowing. The DEWR Skilled Vacancies Index fell by 0.1% in trend terms in May, continuing the downward trajectory evident since November. This is consistent with other forward indicators of the labour market such as the ANZ Job Advertisements series which point to some a moderate slowdown in employment growth in coming months. Data previews Katie Dean Senior Economist Katie.Dean@anz.com Alex Joiner Economist Alex.Joiner@anz.com Riki Polygenis Economist Riki.Polygenis@anz.com Please see ANZ s separate publication ANZ Data and Event Calendar for the schedule of upcoming key local and global data events. Please emr@anz.com if you like to subscribe to this publication. 2 nd June: Retail sales (April) ANZ forecast: +0.3% MoM, +5.9% YoY, Last: +0.5% MoM, +5.1% YoY After two months of flat to negative growth in the first two months of the year, retail sales picked up by 0.5% in March. However, this was largely related to higher food price inflation. Excluding food, retail trade was trending downwards for the first three months of the year, weighed down by rising interest rates, petrol prices and negative wealth effects from equity price falls. However, we expect retail trade to have posted a small improvement in April. The RBA left the cash rate on hold at its April meeting, the stock market rebounded and employment continued to grow strongly. These developments should help to offset the negative impact on household discretionary spending stemming from higher petrol prices. (RP) 2 nd June: Business indicators (Q1) Corporate GOP: ANZ forecast: -1% QoQ, Last: +3.9% QoQ Inventories: ANZ forecast: +/-x% QoQ, Last: +/-x% QoQ March was a tough quarter for profits, which were hit by the unfortunate combination of slower revenue growth and higher input costs. Input costs are likely to have risen sharply across all sectors, driven up by higher interest rates and rising energy prices. Exporters were also hit by spiralling shipping costs and the higher stronger A$ which would have gone some way to offsetting the boost Page 4

5 from higher commodity prices. Meanwhile revenues outside the mining sector are likely to have turned down in line with weaker domestic and global demand. We expect the ABS survey will show modest 1% fall in corporate gross operating profits (GOP), but do believe there are downside risks to this forecast. Inventories are hard to pick this quarter. One of the one hand, large retailers reported that they were cutting stock levels in anticipation of weaker domestic spending. On the other hand, imports of goods accelerated in the March quarter. This is at odds with the slowdown in domestic demand and so points to some inventory overhang. We are therefore calling for inventories to rise by around 1% in the March quarter, to add around 0.1ppt to GDP growth. (KD) 3 rd June: Balance of Payments (Q1) CAD: ANZ forecast: -$21.6bn (7.7% of GDP), Last: -$19.3bn (7.0% of GDP) Net exports contribution: ANZ forecast: -0.8ppts, Last: -1.0ppts We anticipate that the current account deficit will again deteriorate in the March quarter. The trade deficit is expected to widen significantly with import volume growth solid and import prices now starting to rise. Growth in overall export volumes has again been hampered by the strong Australian dollar. Resource exports continue to be restricted, with supply from domestic producers continuing to come on stream at a relatively measured pace. This has been due largely to unresolved infrastructure bottlenecks and extreme weather conditions causing ongoing interruptions to production. Furthermore, in the absence of any prolonged improvements in weather conditions, rural exports remained depressed throughout the quarter. Consequently, we expect net exports to subtract around 0.8ppt from March quarter GDP growth. It remains unclear to what extent the net income deficit will be impacted by the ongoing credit squeeze in global financial markets. Domestic financial institutions are still sourcing the majority of their funding from offshore, despite the significantly higher costs involved. Consequently, we may see increases in the outflow of interest payments in coming quarters. This continued deterioration of the NID will most likely be in stark contrast to improvements that are expected in the trade deficit towards the end of (AJ) 3 rd June: Building approvals (Apr) ANZ forecast: -2.4% MoM, -4.7%YoY, Last: -5.7% MoM, -0.7% YoY Tighter monetary policy in early 2008 has kept residential building activity well and truly subdued in 2008 thus far, especially in the investor-driven other residential building sector. However, what is notable in recent data is that there has not been as significant a trough in the building cycle as there was in previous historical monetary policy tightening cycles. This is most likely due to strong underlying demand for housing. As it stands, underlying demand for new housing is currently running at around 180,000 new dwellings per annum, well ahead of the current rate of completions at less than 150,000. We expect the downward trend in building to continue this month with the industry still reeling after consecutive interest rate hikes earlier in the year. With the risk to interest rates still firmly skewed to the upside, any further rises could send building activity into freefall and further exacerbate shortages in the housing market. (AJ) 3 rd June: RBA cash rate decision (June) ANZ forecast: 7.25%, Last: 7.25% The RBA is expected to keep the cash rate on hold at its June meeting. The RBA is currently in wait and see mode as it assesses whether the economy is slowing as it expects. Most evidence on activity since the last meeting has been consistent with that view, with soft reads on business investment and retail sales (excluding food). However we believe that domestic demand will pick up later in the year, with employment continuing to grow, business investment intentions very strong and households receiving another $11.2bn of tax cuts. In addition, the inflation outlook has deteriorated, with inflation expectations soaring, business selling price expectations trending upwards and global energy and agricultural prices on an upward trajectory. These developments will force the RBA s hand later in the year Page 5

6 and we are forecasting two further rate hikes in August (following the release of Q2 CPI figures) and November. (RP) 4 th June: Gross Domestic Product (GDP) (Q1) ANZ forecast: +0.1% QoQ, Last: +0.6% QoQ This week s GDP data will confirm that the economy slowed sharply in the March quarter. We already know that higher local interest rates and petrol prices, set against a backdrop of global financial market turmoil and a collapse in the local equity market, saw consumer and business spending pull back sharply. Poor weather on the east coast compounded the problems further, constraining mining exports in the quarter. In the absence of a surprisingly large inventory build-up, these factors should push the expenditure side of the national accounts, GDP(E), into negative territory. The income side of the national accounts, GDP(I), should however not slow as sharply. While profits look set to decline (see preview for Corporate GOP above), household incomes should come to the rescue, reflecting strong employment growth and solid wage gains in the March quarter. At this stage, we believe stronger GDP(I) will allow economic growth to make a small positive, of around 0.1%, in the March quarter. This pushes YoY growth down to 2.6%, the weakest rate since September The wildcard for this forecast is profits. If Monday s ABS survey suggests profits fell more sharply than our expectations, it could be enough to turn our growth forecast from a small positive to a small negative, the first negative quarter of growth since December (KD) 5 th June: International trade in goods and services (Apr) Trade balance: ANZ forecast: -$1.8bn, Last: -$2.7bn We could see a significant improvement in the trade balance in April on the back of weaker imports and a strong increase in the value of exports. ABS preliminary data foreshadows a fall in merchandise imports of 3.0% on a balance of payments basis, consistent with soft domestic demand. Despite coal supply from Queensland still being constrained for much of the first half of 2008, significant increases in prices are now coming through. The non-rural component of the RBA commodity price index jumped over 13% in April on the back of large bulk commodity price rises and notwithstanding relatively weak base metal prices. With high bulk commodity prices to continue flowing through to export earnings for at least the next 12 months, improvements in the trade deficit should be ongoing and a trade surplus is not out of the question in the second half of this year. (AJ) Page 6

7 Patricia Gacis Market Strategist Patricia.Gacis@anz.com Phillip Hawkins Graduate Analyst Phillip.Hawkins@anz.com Markets are virtually fully priced for a 25bp RBA rate hike by August. Rates markets may stage a relief rally next week. AUD/JPY is now just under JPY101, an 8-month high. AUD/GBP is trading at just under 10-year highs. Oil prices continue to sour sentiment in equity markets. Market wrap Local rates dragged up by worries over high oil prices and inflation Australian term rates continued to rise this week. Over the week, the 3-year yield rose 8bps to 6.76% and the 10-year yields rose 10bps to 6.56%, just off 8-year highs. Local rates drifted higher on concerns over rising oil prices and its impact on inflation. Oil hit a record high around $US133 last week and has again ended the week above $125 per barrel. Domestic term rates were also dragged higher by moves in offshore rates markets. US Treasury yields rose following better than expected durable goods orders data and poor demand at the Treasury s auction of 5-year and 2-year notes. European yields also rose following some worse-thanexpected German inflation data. But the sell-off in rates markets was pared back by the softer than expected RBA credit aggregates data. Next week is shaping up to be a very busy week for rates markets. Important releases include retail sales (Monday), building approvals (Tuesday), the RBA interest rate decision (Tuesday), Q1 GDP (Wednesday) and the trade balance data (Thursday). As stated above, while we expect the RBA to keep rates on hold next week, we expect two more rate hikes from the RBA by the end of the calendar year. Rates markets are already fully priced for a 25bp RBA rate hike by year s end. Given that rates markets have sold off 55-60bps over the past fortnight or so, the risk now looks to be for the market to stage a relief rally next week. This could be triggered by negative economic growth for the first quarter or by very soft retail sales data. The AUD continues to outperform on the crosses Higher Australian yields and a better performance for global equity markets provided support for the AUD this week. But a sharp sell off in commodity prices overnight and a late rebound in the USD weighed on the AUD by week s end. AUD/USD spent most of the week in a narrow range around but hit a low around overnight. At the time of writing, the AUD has settled around the level. But the AUD continues to outperform on the crosses. AUD/JPY is sitting at an 8-month high at just under the JPY101 level. AUD/EUR has broken through the level and is making tracks to hit February s high around AUD/GBP continues to trade at just under 10-year highs around on the back of weak UK housing data. AUD/NZD has consolidated at around the level. With local rates markets not looking to move significantly higher, at least for now, rate differentials are not likely to lend further support to the AUD at this stage. Base metal prices look to be in a bit of a pull-back on rising inventories and the Australian stock markets have ended down two weeks in a row. So there appears to be short term downside risks for the AUD. The level remains key support for the AUD/USD. High oil prices and a sharp fall in commodity prices weighed on Australian equities High oil prices soured sentiment in equity markets this week. Stocks were hit early on rising concerns that higher energy prices would lead to a slowdown in domestic demand. The ASX200 hit a 2-month low on Wednesday at around 5629, but managed to move back above the 5700 level on Thursday on M&A activity in the resource sector. Midwest Corp Ltd received a takeover offer from Murchison Metals, China s Baosteel entered into talks to purchase an 8% stake in Fortescue Metals and Santos sold its LNG business to Malaysian energy company Petronas. But sharp falls in commodity prices overnight weighed on resource stocks and eroded most of Thursday s gains. Origin Energy bucked the trend, after the company rejected a takeover offer from British gas and upgraded its coal seam gas reserve estimates. At the time of writing, the S&P ASX200 was down 1.4% for the week. Page 7

8 ANZ economic and financial market forecasts Australian economic indicators f 2009f 2010f Economic activity (annual % change) Private final demand Household consumption Dwelling investment Business investment Public demand Domestic final demand Inventories (contribution to GDP) Gross National Expenditure (GNE) Exports Imports Net Exports (contribution to GDP) Gross Domestic Product (GDP) Prices and wages (annual % change) Inflation: Headline CPI Underlying* Wages Labour market Employment (annual % change) Unemployment rate (%) External sector Current account balance: A$ bn % of GDP *Average of RBA weighted median and trimmed mean statistical measures. Australian interest rates Current Jun 08f Sep 08f Dec 08f Mar 09f Jun 09f RBA cash rate day bill year bond year bond s10s yield curve year swap year swap International interest rates RBNZ cash rate NZ 90 day bill US Fed funds note US 2 year note US 10 year note Japan call rate ECB refinance rate UK repo rate For additional information on interest rates please refer to ANZ s Interest Rate Strategy Weekly. Page 8

9 Foreign exchange rates Current Jun 08f Sep 08f Dec 08f Mar 09f Jun 09f Australia and NZ exchange rates A$/US$ NZ$/US$ A$/ A$/ A$/ A$/NZ$ A$/CA$ A$/CHF A$/CNY A$ Trade weighted index International cross rates US$/ /US$ / /US$ / US$/CA$ US$/CHF US$ index Asia exchange rates US$/CNY US$/HKD US$/IDR US$/INR US$/KRW US$/MYR US$/PHP US$/SGD US$/THB US$/TWD US$/VND Pacific exchange rates PGK/US$ FJD/US$ For additional information on foreign exchange rates please refer to ANZ s FX Weekly Page 9

10 Contacts ANZ Economics & Markets Saul Eslake Fiona Allen Chief Economist Business Manager Saul.Eslake@anz.com Fiona.Allen@anz.com Tony Pearson Mark Rodrigues Julie Toth Deputy Chief Economist, Industry and Strategic Senior Economist, Industry and Strategic Senior Economist, Industry and Strategic Tony.Pearson@anz.com Mark.Rodrigues@anz.com Julie.Toth@anz.com Warren Hogan Co-Head of Australian Economics and Interest Rate Sally Auld Co-Head of Australian Economics and Interest Rate Katie Dean Riki Polygenis Dr. Alex Joiner Senior Economist, Australian Economics and Interest Rate Economist, Australian Economics and Interest Rate Economist, Australian Economics and Interest Rate Warren.Hogan@anz.com Sally.Auld@anz.com Katie.Dean@anz.com Riki.Polygenis@anz.com Alex.Joiner@anz.com David Croy Patricia Gacis Senior Market Strategist, Market Strategist, Australian Economics and Australian Economics and Interest Rates Interest Rates (London) David.Croy@anz.com Patricia.Gacis@anz.com Amy Auster Tony Morriss Jasmine Robinson Head of Foreign Exchange and International Economics Senior Currency Strategist, Foreign Exchange and International Economics Senior Economist, Foreign Exchange and International Economics Amy.Auster@anz.com Tony.Morriss@anz.com Jasmine.Robinson@anz.com Mark Pervan Head of Commodities Mark.Pervan@anz.com Paul Braddick Ange Montalti Dr. Alex Joiner Stephanie Wayne Head of Property and Financial System Senior Economist, Property and Financial System Economist, Property and Financial System Analyst, Property and Financial System Paul.Braddick@anz.com Ange.Montalti@anz.com Alex.Joiner@anz.com Stephanie.Wayne@anz.com Amber Rabinov Economist, Asian Economics and Markets Amber.Rabinov@anz.com ANZ New Zealand Cameron Bagrie Khoon Goh Philip Borkin Steve Edwards Kevin Wilson Chief Economist Senior Economist Economist Economist Rural Economist bagriec@anz.com gohk@anz.com borkinp@anz.com edwards1@anz.com wilsonk1@anz.com Page 10

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