Following the stronger-than-expected March quarter GDP print of +0.4%qoq, we have upgraded our economic forecasts. We now expect that the Australian economy will expand 0.25% in calendar 2009 (-0.2% previously) and 2.75% in 2010 (2.2% previously).
Key Points:There is some cause for celebration in that Australia had managed to avoid 2 consecutive quarters of economic contraction and it is now likely that economic forecasters will have to upgrade their views on the Australian economy significantly. Indeed, Australia appears to be the only developed nation not to experience a contraction in GDP in the March quarter and the best placed to deliver a sustained recovery!
However, without doubt the March quarter overstates the strength of the domestic economy. In attempting to separate the signal from the noise in this data release the message remains pretty clear, the Australian economy is still in recession and it is a very mild one in the historical context.
Treasury and RBA GDP forecasts now require consecutive negative 0.5%qoq GDP prints for the remaining quarters of 2009 to return GDP growth to their -1.0%yoy growth forecast by calendar year end-2009. While this is possible we believe it is unlikely. Financial conditions remain high conducive to a reacceleration in economic growth in 2H09, the record fiscal stimulus is heavily skewed to mid-09, Australia remains at the pointy end of the rebuilding in global inventories and there is already sufficient evidence in the interest rate sensitive sectors of the economy that a recovery has commenced.
Investment View:
We believe that the monetary and fiscal stimulus is too large, the rebound in global production indicators too strong and the 'green shoots' evident in the Australian economy already sufficiently encouraging to support a sustainable recovery into 2010.
Not only has Australia avoided a 'technical' recession, the narrative of how it can return to respectable rates of economic growth within a reasonable timeframe is far more compelling than the developed nations in the Northern hemisphere. When viewed in this light it is remarkable that the Australian equity market declined in tandem with the US and European equity markets and why it continues to lag the same markets during the equity market rally since March.
We expect that the RBA will have to upgrade its economic growth views. Indeed, it is increasingly likely that the RBA will leave interest rates unchanged in 2009. Nevertheless, the RBA will likely retain its easing bias since it is acutely aware of the need to continue to support the rise in consumer confidence amid a rising unemployment trend and to limit the A$'s near-term appreciation. At this stage we have chosen to leave our forecast 25bp rate reductions in September and October in our forecasts. As long as consumer and business confidence continue to rise and as long as asset prices reverse part of the excessive declines of 2008, the RBA will revert to thinking less about short term support strategies for economic growth and more about setting interest rates on the path to 'neutral' through the course of 2010.
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