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Economic Research
Global Data Watch
May 6, 2011
59
J.P. Morgan Australia Limited, Sydney
Stephen Walters
Ben Jarman
Helen Kevans
Australia and New Zealand
RBA sidelined again, but commentary hints that ratehikes are on the way
Aussie retail volumes flat in 1Q; value of sales de-
pressed by lower prices
NZ employment bounced in 1Q, jobless rate unex-
pectedly dropped
Central bank commentary dominated events in Australia
this week, even though there also was a steady flow of eco-
nomic data. The RBA left the cash rate unchanged Tues-
day, as expected, but issued a statement that hinted officials
have become more anxious about the inflation outlook. In-
deed, on Friday, the RBA lifted the official inflation fore-casts to show core inflation above target in two years time.
The change reflects an unexpectedly high 1Q outcome and
is a matter of arithmetic, but also is a signal that rate hikes
are closer than many believe. We continue to forecast a
hike in August, but the risk of an earlier move is rising.
Prior to the release of the official forecasts, the RBAs
commentary Tuesday indicated that elevated AUD, which
hit a fresh post-float high this week, was doing some of the
heavy lifting in tightening monetary conditions, but played
down the significance of AUD on the economy.
Fiscal policy the focus next week
This weeks data flow in Australia showed a drop in house
prices in 1Q, but a big rise in approvals for new construc-
tion in March. The retail sales data Friday showed flat sales
volumes in 1Q and a fall in nominal sales in March, but
much of the weakness in the value of sales can be attrib-
uted to import price falls owing to high AUD.
Fiscal policy takes center stage next week when Federal
Treasurer Swan on Tuesday releases the annual Budget (see
research note Australias Budget to include long-overdue
austerity, in this GDW). We expect the Treasurer to an-
nounce a deficit of close to A$50 billion for the year ended
June 30, close to the record deficit he announced last year,and much larger than Treasury had forecast last November.
Receipt of the proceeds from the terms of trade boom has
been delayed, but eventually will fill the Treasurys coffers.
The Treasurers promise of delivering a budget surplus
within two years, therefore, seems reasonable.
In New Zealand data this week, the jobless rate unexpect-
edly fell in 1Q, and although figures were distorted by the
impact of the Canterbury earthquake, the labor market ap-
pears to be improving. Indeed, trend employment has
edged higher since September 2009, albeit at a frustratingly
slow pace. The highlight in NZ next week will be the elec-
tronic card transactions data, which have replaced the retail
sales report. Growth in electronic card transactions (ECT)accelerated in March following the earthquakes in
Christchurch (Feb. 22), but we suspect there will be some
payback in April. The fact that wage growth pulled back in
1Q (to 0.4%q/q from 0.6%) also implies that the retail sec-
tor will continue to struggle and that households will re-
main inclined to pay down debt.
RBA left cash rate unchanged ... again
The RBA this week left the cash rate unchanged at 4.75%,
as we and the majority of market economists had expected,
but there were notable, albeit virtually offsetting, changes
in the commentary. The statement, therefore, delivers amessage broadly consistent with what officials said a month
ago. Through all the statistical noise, natural disasters, the
soaring currency, last weeks inflation shock, and recent
offshore developments, not much has changed. The official
cash rate is headed up, but not yet.
Officials, for example, stepped up the tone of the language
in reference to the terms of trade, which is higher than they
expected. Importantly, they now have called the bottom for
the inflation cycle. The recent information suggests that the
0.8
0.9
1.0
1.1
Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11
AUD/USD
Australian dollar
-15
-10
-5
0
5
10
40
60
80
100
120
Index
Australia: terms of trade and budget balance
A$bn
90 95 00 05 10
Terms of trade
Budget b alance
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Economic Research
Australia and New Zealand
May 6, 2011
J.P. Morgan Australia Limited, Sydney
Stephen Walters
Ben Jarman
Helen Kevans
marked decline in underlying inflation from the peak in
2008 has now run its course. RBA officials did, however,
tone down the language elsewhere. For example, the com-
mentary says that high AUD (if sustained) will be a source
of restraint for the traded goods sector, and GDP likely will
have contracted in 1Q, owing to the floods in Queensland
and the later cyclone.
As we had expected, officials did not add an explicit quali-
fier to the paragraph at the end discussing the appropriate-
ness of the policy stance (such as for now or for the
time being). Doing so risked ringing alarm bells about an
imminent tightening. There was one addition to the last
paragraph, referring to the Board assessing carefully the
evolving outlook for growth and inflationbut dont offi-
cials do that every month? We doubt this sends any particu-lar signal about the likely timing of the next hike. For now
then, with the policy stance appropriate as before, Board
members seem happy to sit on the policy sidelines while
they watch how things unfold.
Indeed, there are enough lingering uncertainties to keep the
RBA sidelined in the near term. As these recede, though,
we expect the tightening cycle to resume. While Board
members seem comfortable that a mildly restrictive
policy stance is the one to maintain, we still believe the
next rate hike is likely within months. Our preferred timing
is the August Board meeting but, with inflation already
having bottomed, the intervening meetings also are live.
RBA lifted inflation forecasts in SoMP
On Friday, the RBA released its much-anticipated quarterly
Statement on Monetary Policy (SoMP), which included ma-
terial official forecast revisions. The most striking of these
were the upward revisions to the Banks inflation forecasts,
with the official forecasts for headline and core inflation
above the RBAs 2%-3% target range for the year ending
December 2013. Indeed, the Board flagged that underlying
inflation would increase gradually over the forecast hori-
zon, but by end-2013 would be above target at 3.25%.
The clear message from the SoMP is that further policy
tightening is warranted. While higher AUD and household
caution are helping to cap the inflation pressures associated
with the resources boom, with the underlying inflation fore-
cast to be at the top end of the Banks target over much of
the next couple of years, our assessment remains that the
cash rate still has further to rise. We forecast another two
rate hikes this year. Indeed, it seems to us that the flood
rebuilding effort will boost aggregate demand when the
economy already has little spare capacity. And, with GDP
growth expected to be at or above trend over the next few
years, at a time when spare capacity is limited and the labor
market continues to tighten (the RBA now forecasts the
unemployment rate at 4.25% by end-2013, comfortably
below the 5% level consistent with full employment).
The impact of the natural disasters has been greater than
officials assumed in the February SoMP, mainly owing to
problems in removing water from flooded coal pits, which
has delayed the resumption of coal production. These ef-
fects would, though, be temporary. The medium-term eco-
nomic outlook continues to be dominated by the booming
terms of trade (which the RBA expects will rise further in
2Q to be above the level assumed a few months ago) and
building mining investment. An important offset to this
strength remained the household sector, which remainedcautious and reluctant to spend despite continued strength
in the labor market. The RBA assumed in its forecasts that
households would remain cautious, and the saving rate
would remain steady at elevated levels, but acknowledged
the risks around this view. On the one hand, recent house-
hold austerity could become even more pronounceda
result of a structural shift in behaviorbut, on the other,
should consumers become more confident as labor market
conditions tighten and wage growth accelerates, then stron-
ger consumption growth could follow accordingly.
-30
-20
-10
0
10
20
-1
0
1
2
3
4
5
%6m ar
Australia: NAB survey and employment growth
Index, advanced 4 mo.
2006 2007 2008 2009 2010 2011
NAB employment
Employment
0
6
12
%oya
Australia: retail sales
2005 2006 2007 2008 2009 2010 2011
Food
Total
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Economic Research
Global Data Watch
May 6, 2011
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J.P. Morgan Australia Limited, Sydney
Stephen Walters
Ben Jarman
Helen Kevans
Indeed, the most significant risk to the RBAs assumed out-
look revolves around the labor market. The RBA high-
lighted that, should companies compete more aggressively
for labor, upward pressure on wages may intensify. Offi-
cials discomfort with this scenario stems from past experi-
ence. In the early stages of the last resource boom (in 2006-
08), labor market pressures appeared contained, but domes-
tic inflation soon picked up significantly amid high levels
of economy-wide capacity utilization and stronger growth
in global commodity prices. As such, while our base case is
for the next hike to be delivered in August, an upside sur-
prise in the upcoming employment and wage data prior to
the RBAs June Board meeting would significantly in-
crease the likelihood of an earlier rate hike.
With respect to the employment numbers next week, after aparticularly strong labor force survey in March, which
showed a spike in employment (mainly owing to full-time
jobs) and a drop in the unemployment rate (despite a rise in
participation), we expect some payback in April. We fore-
cast a sharp pullback in job growth from a jump of 38,000
jobs in March to just 10,000 last month. A steady partici-
pation rate should allow the unemployment rate to remain
unchanged at 4.9%.
Retail sales and house prices weak in 1Q
The Aussie March retail sales report involved twin shocks:
an unexpected fall in the value of sales in March, and a
very weak volumes report for the March quarter. Sales vol-
umes were flat over the quarter; we had anticipated a 1.0%
rise. The weak volumes result means GDP for the quarter
now is much more likely to have fallen. We had thought
that higher retail volumes would partly offset the drag on
output from the floods in January.
Total retail sales values dropped 0.5%m/m in March. The
more discretionary areas of retailing were weakest, with
department store sales, for example, plunging 3%m/m. The
impact of higher day-to-day living costs on consumer
spending was most evident on discretionary sales, with our
measure of discretionary spending falling 0.8%m/m. Non-discretionary spending also was weak, however, falling
0.3%m/m, thanks mainly to a drop in food sales (-0.4%).
The value of food fell, partly as prices dropped back from
the flood-induced highs reached in February.
As already highlighted, from the RBAs standpoint, such
household austerity continues to provide scope for officials
to sit on the policy sidelines. If consumers were less con-
servative, at the same time that the terms of trade and in-
vestment were booming, the RBA likely would be much
closer to tightening policy. But this weeks retail data sug-
gest that consumers remain cautious, in keeping with the
recent theme prominent in RBA commentary. Indeed, the
RBA this week highlighted the weakness on the consumerfront, with credit growth to households having softened
and house prices having headed south.
House prices nationally fell in 1Q, but the physical approv-
als data for March showed a 9% rise. The latter, though,
comes after large falls in recent months. Approvals are still
running well below housing demand, so we expect house
prices to be supported, at least for now. Indeed, the under-
lying pulse of building approvals and housing finance is
weak. Turnover in the housing market is skittish, and now
prices are beginning to suffer as well. We continue to ex-
pect dwelling prices to perform better than weakening de-
mand for housing finance would imply, given that the ab-sence of a forced sellerdue to robust national income
growth and low unemploymentshould generate some
withdrawal of supply to compensate.
NZ labor market heading in right direction
The recovery in the New Zealand labor market continued
into 2011, with the economy adding 30,000 jobs over the
March quarter. The labor force data were, though, affected
by difficulties with data collection in Canterbury following
0
2
4
6
8
10
%oya
New Zealand: electronic card transactions
2008 2009 2010 2011
Total
Retail
Core retail
3
4
5
6
7
%
New Zealand: unemployment rate
00 02 04 06 08 10 12
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Economic Research
Australia and New Zealand
May 6, 2011
J.P. Morgan Australia Limited, Sydney
Stephen Walters
Ben Jarman
Helen Kevans
the February earthquake, such that a different method from
usual had to be used to estimate data from this area. In the
week after the earthquake, Statistics New Zealand sus-
pended interviews in some areas, resulting in 800 responses
of the 2,200 Canterbury households in the survey sample
not being collected. This implies, though, that just 5% of
the nationwide survey sample of 15,000 was affected; thus,
the impact on the national estimates from this disruption to
data collection was small.
The steady rise in the trend employment rate since the Sep-
tember 2009 quarter suggests, however, that a modest re-
covery is under way in the labor market. Indeed, on an an-
nual basis, trend employment rose by 39,000 in 1Q, or
1.8%. The trend unemployment rate also has remained
fairly stable since 3Q09. Furthermore, on a seasonally ad-justed basis, the unemployment rate fell 0.1%-pt from 6.7%
to 6.6% in 1Q, with the sharp spike in employment growth
being offset by one in the participation rate.
Australia:
Data releases and forecasts
Week of May 9 - 13
Tue Trade balanceMay 10
11:30am Dec Jan Feb Mar
A$ mn 1778 1433 -205 500
Tue NAB business confidenceMay 10 Net balance
11:30am Jan Feb Mar Apr
Index 4 14 9 10
Thu Labor force surveyMay 12 Sa
11:30am Jan Feb Mar Apr
Unemployment rate (%) 5.0 5.0 4.9 4.9Employment (ch. 000s) 14 -9 38 10Participation rate (%) 65.8 65.7 65.8 65.8
Review of past weeks data
House price indexSa
3Q10 4Q10 1Q11
%q/q -0.3 -1.1 0.7 0.8 -1.0 -1.7%oya 10.8 9.9 5.8 5.0 0.5 -0.2
RBA cash rate announcement
No change delivered. See main text.
Building approvalsSa
Jan Feb Mar
%m/m -11.6 -10.7 -7.4 -5.3 3.2 9.1%oya -16.4 -15.6 -21.8 -13.3 -25.8 -18.1
Retail salesSa
Jan Feb Mar
%m/m 0.4 0.3 0.5 0.8 0.3 -0.5%oya 1.6 3.6 3.1 2.3
Retail sales ex. inflationSa
3Q10 4Q10 1Q11
%q/q 1.2 0.5 -0.4 1.0 0.0
%oya 3.82.7
1.91.1
2.81.8
New Zealand:
Data releases and forecasts
Week of May 9 - 13
Tue Electronic card transactionsMay 10
8:45am Jan Feb Mar Apr
Total %m/m 2.3 0.4 0.5 -1.1Total %oya 5.5 6.1 5.6 5.5
Retail %m/m 2.4 -0.2 1.3 -0.9Retail %oya 6.4 6.2 5.9 6.5
Review of past weeks data
Private sector wages (ex. overtime)Sa
3Q10 4Q10 1Q11
%q/q 0.6 0.6 0.6 0.4%oya 1.6 1.9 2.2 2.0
Building permitsSa
Jan Feb Mar
%m/m 9.0 -9.8 2.5 2.2%oya -14.9 -29.1 -25.9 -26.2
Labor force surveySa
3Q10 4Q10 1Q11
Unemployment rate (%) 6.4 6.8 6.8 6.6Employment (000) 23.0 -11.0 13.3 30.0Participation rate (%) 68.3 67.9 68.2 68.7