Australian & New Zealand Weekly

Week beginning 12 January

• Australian data: housing finance to rise, jobs market to weaken.
• NZ data: Q4 NZIER survey, building consents, & REINZ house prices.
• ECB to cut rates, expecting 0.5% reduction to 2.0%.
• US data: trade, retail, industrial prod'n, CPI, PPI, consumer sentiment.
• Fed: Bernanke speaks in London, Beige book & various Fed speakers.
• Key economic & financial forecasts.

Australia: Data Wrap

Nov retail trade

• Retail sales showed some resilience in November, increasing by 0.4%.
• in line with our forecast but much stronger than the market (mkt -0.4%, WBC f'c 0.3%).
• A firmer tone to retail sales has emerged as consumers have more to spend with the RBA slashing interest rates and petrol prices tumbling.
• The Federal Governments sizeable $8.4bn stimulus in the form of cash handouts in December will further support sales. What remains to be seen is just how much of the money will be saved and the timing of any additional spending.
• Equally, a sharp recovery in sales is not apparent and not expected. Consumers are pessimistic as they feel less comfortable about their job security. That's triggered a general cut back in discretionary spending.

Nov trade balance

• The trade balance was still comfortably in surplus in November, at $1.45bn.
• However, there was a sharp narrowing, down from a record surplus of $2.96bn in October. The market was expecting a $2.1bn surplus.
• Exports eased 3.6% in the month. We'd view that as largely a consolidation, following a 7.0% surge in October and a 19% leap over the three months to October.
• We expect exports to rebound in December, although softer global demand will temper any lift. Notably, the detail shows that export weakness in November was concentrated in the metal ores segment.
• Imports increased 2.0% in November. That is not as strong as it sounds. It most likely reflects higher prices given that the Australian dollar fell 5% in the month against the USD.
• The detail reveals that import strength was concentrated in the volatile gold item. Excluding gold, imports edged 0.2% lower in the month. More generally, a softening of import volume growth is apparent against the backdrop of subdued domestic demand.

Nov dwelling approvals

• Dwelling approvals were much weaker than expected, declining by 12.8% in November. That followed a 3.1% fall in October (revised up from -5.4%).
• Private house approvals dropped almost 10% in the month and units slumped by 22% (see table).
• The resource rich states showed the greatest decline in approvals since mid-year. These states were hit by the double whammy of the RBA's aggressive tightening of monetary policy and the correction of global commodity prices.
• The sharp decline in approvals since mid-year exceeds our expectations and points to a larger decline in dwelling construction over the first half of 2009 than factored into our forecasts.
• The recent substantial policy u-turn by the RBA will trigger a lift in demand for housing and points to a lift in approvals over coming months. In turn, construction is likely to improve during the second half of 2009. However, rising unemployment will temper the speed of the recovery.
• Declines in construction activity will also be evident over the first half of 2009 in housing renovation work and in non-residential building.
• Renovation approvals, down 0.6% s.a. in November, trended 8.4% lower since mid-year. Higher interest rates and downbeat consumer mood were key negatives.
• The value of non-residential building approvals declined 1.6% in November after a 37% plunge in October. The credit crunch, and the weakening activity environment, are biting hard. The risk is that approvals decline further during 2009 given the tightening of lending standards.

Round-up of local data released last week

New Zealand: The Week ahead & Economic Wrap

Bring on 2009?

Domestic data in the closing stages of 2008 confirmed what we already knew - economic activity was weak. And indicators are not suggesting much improvement as we head into 2009.

GDP data confirmed that New Zealand was in recession for the first nine months of 2008, with third quarter GDP falling 0.4%. Annual GDP growth is now running at -0.1%. The result was broadly in line with expectations, and reflected weak demand across the board - households spent less, businesses invested less, and we exported less. A few bright spots came from drought recovery (boosting agricultural and electricity production) and government spending. But overall, there were few signs that conditions will improve in the near term. In fact, the odds are for a further contraction in fourth quarter GDP, meaning the economy was in recession for all of 2008.

Heading into 2009, the indicators are pointing to a very soft start. On the business front, confidence showed a slight improvement in sentiment relative to November, but the more important own-activity measure (generally a better indicator of current GDP) hit the lowest level in the 20-year history of this survey. Profit expectations, employment and investment intentions also established new record lows.

Confidence amongst consumers also eased back in the December quarter, with the Westpac McDermott Miller Index falling 3.5 points to 101.3. The fall was driven largely by concerns over the short term economic outlook, with a net 45% of respondents saying they expected economic conditions to deteriorate over the next twelve months - lower than the net -17% in the September 2008 quarter and close to the 10 year low recorded for this series in the June 2008 quarter. It seems the escalation of the global financial market turmoil into a full blown global economic downturn overwhelmed consumers at the end of last year, particularly in the dairy-intensive regions of New Zealand. In fact, it is worth noting that the fall in confidence was largely concentrated in the Canterbury and Waikato regions and was almost entirely amongst males. Arguably, dairy farmers have felt the ill-winds of the global downturn earlier than many other consumers, with Fonterra revising down its forecast for the payout this season from $7.00/kg milksolids to $6.00/kg currently, and there is a risk that it may be even lower given the continued falls in dairy commodity prices. This will see farmers' incomes take a substantial hit over the coming year relative to the past year, so it is not surprising that consumers in these regions are feeling downbeat. Overall, though, the message is that in the eyes of the consumer, not even lower fuel prices, falling interest rates, or the new government can rescue the New Zealand economy from the wrath of the global downturn over the coming year.

Adding to consumers' woes is the deteriorating outlook for employment, with the latest survey of Employment Confidence making for grim reading. Confidence amongst workers plunged to the lowest level in 4½ years in the December 2008 quarter survey, as perceptions around employment conditions collapsed and job security fell to a new low. Views around earnings were more mixed: current earnings were up, but expectations of future earnings were down. On the whole, the results of the survey represent a major shift in workers' perceptions of the labour market and that does not augur well for economic activity as we head into 2009.

Offshore, evidence has emerged over the Christmas break that monetary and fiscal policy initiatives are beginning to have a positive impact. Importantly, in the US, bond and LIBOR spreads have narrowed and various private sector borrowing rates have finally started to fall. But by and large, credit conditions remain extremely difficult, and lending rates are still high. That suggests there is still more work to be done by policy makers across the globe, and we expect the recent shift toward more unorthodox policy measures (such as quantitative easing and liquidity measures) to continue through at least the first half of 2009.

Looking toward the coming week, the most important domestic data event will be the release of the NZIER Quarterly Survey of Business Opinion on Tuesday. Based on recent monthly business surveys, the QSBO is expected to provide an ugly read on economic activity for the first half of 2009. Domestic trading activity is likely to be down, along with employment and investment intentions. We should also get an update on the housing market from REINZ sometime in the coming week (although it may be pushed into the following week due to the holidays), and building consents are due out on Wednesday. Both are expected to show activity levels remain very low.

Round-up of local data released last week

Data Previews

Aus Nov housing finance

Jan 14, Last: 1.3%, WBC f/c: 3.0%

Mkt f/c: 1.0%, Range: -5.0% to 4.0%

• Now for the recovery. We're forecast housing finance approval numbers for owner occupiers to rise by 3.0% in November, following a 1.3% increase in October.
• Housing finance is expected to respond to the RBA's recent aggressive rate cuts, moves which more than reversed the tightening cycle of late 2007/early 2008. New housing finance dropped sharply, down 25%, over the five months to June and then fell only a further 3% over the three months to Sep.
• The RBA cut rates by just 0.25% in September and then by 1.0% in October and 0.75% in November. The vast bulk of this has been passed on to lower mortgage rates.
• The broadness of the recovery will be of great interest. Notably, is demand improving in new construction as well as for established and are investors returning to the market?

Aus Dec unemployment rate

Jan 15, Last: 4.4%, WBC f/c: 4.5%

Mkt f/c: 4.5%, Range: 4.3% to 4.7%

• Despite a partially offsetting pullback in the participation rate to 65.1% from 65.2%, the November employment fall was sufficient to allow the unemployment rate to edge up to 4.4%, the highest in a year, after spending six of the prior seven months stuck at 4.3%. The trend unemployment rate was steady at 4.3% (only just - it was 4.345% to three decimals) for the fifth consecutive month, up from a low of 4.1% in February 2008.
• Just as last month's jobs decline was accompanied by a fall in the participation rate of 0.2ppts, our forecast 6k fall in December jobs is also likely to be accompanied to a smaller dip in participation to 65.0%. This would partially offset the jobs decline, but still lift the unemployment rate to 4.5% from 4.4%, the highest since March 2007.

NZ Dec REINZ house prices

Jan 12-21, Last: -4.1% yr

• November house sales were weak on a s.adj basis, to be down 45% on a year ago. However, this series has been particularly volatile through 2008, so we do not put too much emphasis on the outturn. Our overall take is that house sales hit rock bottom in early-2008 and have stayed there ever since. We expect that trend to continue through the first half of 2009.
• In contrast, house prices ticked up slightly, although that is normal for the time of year. On balance, we think there is now enough evidence to say that the pace of decline in house prices has let up. We put this down to much lower interest rates. However, negatives for the housing market include the shaky labour market and lower income tax rates (which reduce the tax-shelter motive for owning property). We expect house prices to continue declining in 2009, but less viciously than they declined in 2008.

NZ Q4 NZIER business confidence

Jan 13, Last: -19%

• The headline measures of the QSBO improved in Q3 from the dismal levels seen in the first half of this year. But the survey was taken just prior to the start of the tumultuous events in global markets in October, so expect a deterioration in Q4.
• The details of the survey could make for ugly reading if recent indicators are anything to go by. While the headline confidence measure may not fall back to the lows seen in the first half of the year (lower fuel prices and interest rates should help provide some relief), other indicators such as own activity, investment and employment intentions, could test past lows.
• In terms of the inflation indicators, we expect to see signs of a further easing in pressures, with cost expectations and pricing intentions down off the back of lower fuel prices. Capacity utilization and difficulty of finding skilled labour should also show evidence of reduced demand pressures.

NZ Nov building consents s.a.

Jan 14, Last: -21.9%, WBC f/c: 3.0%

• New dwelling consents plunged 21.9% (s.a.) in October, more than unwinding the apartment-induced increase in September. Weakness came through in both the apartment and ex-apartment categories - only 50 apartment consents were granted in the month (the second lowest since April 2000) and just 1,070 in the ex-apartment group.
• We expect activity to have been weak through November, despite the considerable fall in interest rates. Access to credit remains a much more pressing issue for developers and builders at present, along with the slump in confidence surrounding the global outlook. Our forecast is for a small pick up in the month of 3%, but the risk is for another weak outturn.
• Non-residential consents have been picking up recently and we will be looking for that strength to be sustained through November.

US Nov trade balance, US$bn

Jan 13, Last: -57.2, Mkt f/c -52.0, WBC f/c -47.0

• The US trade deficit showed some improvement in the second half of the year, a trend that is expected to extend into Nov.
• The deficit came in at $57.2bn in Oct, down from an average $59.5bn deficit over the first half of 2008.
• We're forecasting the deficit to narrow further in Nov, with the sharp fall in oil prices expected to be the dominate factor. As a net oil importer, the US is benefitting from the sharp retreat in crude. Prices fell 25% in Nov, after a 26% drop in Oct. Crude dropped a further 28% in Dec.
• However, the underlying trade volume position has deteriorated. Not only are imports weak, given soft US demand conditions, but export growth has slowed as conditions in the rest of the world lost momentum.

US Dec retail sales

Jan 14, Last: -1.8%, Mkt f/c -1.2%, WBC f/c -0.9%

ex autos, Last: -1.6%, Mkt f/c -1.4%, WBC f/c -1.2%

• With the consumer under pressure, retail sales have weakened considerably in the US. Reports suggest that turnvoer remained soft in Dec.
• Retail contracted by 1.8% in Nov and by 1.6% ex-autos. That reflected weakening auto sales and falling gasoline prices. Unexpectedly, sales ex autos and ex gasoline partially recovered, rising by 0.3% after falls of 0.7% in both Sep & Oct. Nominal sales (ex-auto & ex-gasoline) were flat over the year.
• As for Dec, a positive is that auto sales appeared to stabilise. However, anecdotes suggest underlying sales volumes remained weak. Retailers have responded with general discounting as they attempt to clear stock after a disappointing Thanksgiving. So we would look to falling prices, including lower gasoline costs, to weigh on nominal sales

US Dec PPI & CPI

Jan 15, PPI, Last: -2.2%, Mkt f/c -2.0%, WBC f/c -2.0%

Jan 16, CPI, Last: -1.7%, Mkt f/c -0.9%, WBC f/c -0.7%

• Inflation has quickly become yesterday's problem. Fed officials are now more concerned by the possibility of deflation.
• Notably, falling commodity prices, including food and particularly sharp declines in energy costs have triggered a sharp retreat in inflation.
• The PPI fell by 2.2% in Nov and rose by just 0.1% on a core basis. A slightly smaller decline in headline PPI is expected in Dec as energy and food prices fell at a less rapid pace. Core PPI is expected to hold at 0.1%.
• It is a similar story for the headline CPI, with a drop of less than 1% expected after the 1.7% decline in Nov. We see the risk of another flat core CPI (compared to the mkt at 0.1%) given general discounting in the economy at a time of weak demand.

US Dec industrial production

Jan 16, Last: -0.6%, Mkt f/c -0.8%, WBC f/c -1.0%

• Industrial production, which is going backwards reflecting the weakening manufacturing sector, most likely deteriorated further in Dec.
• There was a 0.6% drop in IP in Nov, with manufacturing falling 1.4%. That took annual IP growth to -5.5% and manufacting to -7.3%, with the auto sector doing it particularly tough.
• A larger fall in IP is expected in Dec - we're forecasting a 1.0% drop. The ISM manufacturing production index collapsed to 25.5 in the month, down from 31.5 in Nov and from over 50 back in Aug.
• The mining sector is also weakening as commodity prices retreat. By contrast, utilities are expected to be a mild positive.

Eur ECB rate announcement

Jan 15, Last: 2.50%, Mkt f/c 2.0%, WBC f/c 2.0%

• Official interest rates are tumbling around the globe as the world economy sinks into recession. The ECB is set to deliver an additional rate cut when they meet in January.
• The ECB, after a surprising interest rate rise of 0.25% to 4.25% in July, joined the co-ordinated rate cut of 0.5% in Oct, lowered rates by a further 0.5% in Nov and played catch-up by cutting rates 0.75% in Dec.
• With rates now at a relatively low level we expect a 0.5% reduction in Jan and anticipate a low point of 1.0%. There is no doubt the ECB has more work to do. The economy, which has been in recession since Easter (with Q2 & Q3 GDP contracting by 0.2%) showed a faster rate of deterioration in Q4. ECB officials now feel they have more scope to move with inflation dropping to below the 2% target, falling to 1.6% in Dec, down from 2.1% in Nov & down from 4.1% in Jul.

Westpac Institutional Bank
http://www.westpac.com.au

Disclaimer

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