Goldman Sachs JB Were - Australia, the leader of the park

Defying the initial market expectations for a second consecutive contraction in aggregate activity, GDP printed a meaningful upside surprise in 1Q09 - rising by 0.4%qoq. Even if the 2.2ppt contribution from net exports flags considerably weaker underlying momentum (we note domestic demand fell 1.0%qoq), Australis has the favorable distinction of being the only developed economy to expand into 2009.

Following this better-than -expected start of the year, we upgraded our growth forecasts. We now expect the Australian economy to expand by 0.25% in 2009 (was -0.2%) and by 2.75% in 2010 (was +2.2%). These forecasts are at, or near, the top of consensus for the years.

To be clear, we are far from bullish on growth in 2Q09 - indeed, activity will surely remain quite sluggish. However, we believe the prospects for durable recovery in 2H2009 are very encouraging, and particularly as potential drivers broaden beyond housing construction to consumption, public demand and external sector. Increasingly positive domestic dataflow, coupled with stronger data out of US and China, have led us to remove our forecast rate cuts.

We are now forecasting that the cash rate will remain at the current level of 3% through 2009, before rate hikes next year in March (+50bp), May (+50bp), August (+25bp) and November (+25bp) see it settle at 4.5% by the end of 2010.