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ab Global Economics Research Australia UBS Investment Research Sydney Australian Economic Perspectives Cracks appearing in RBA’s ‘trend’ economy? 30 March 2012 Overview www.ubs.com/economics When the RBA left the cash rate unchanged in early March, it continued to refer to growth as “close to trend overall”. But last week, Stevens sounded a little less sure, noting that while a number of factors “had” been leading them to conclude growth Scott Haslem was trend, the GDP accounts – released post the March meeting – were suggesting Economist the economy was running “somewhat below trend over 2011”. There continues to firstname.lastname@example.org be ongoing uncertainty about just what is the economy’s current pace. +61-2-9324 3663 George Tharenou This week we pull together a handful of the latest very-forward looking indicators Economist which flag the risk that the modest improvement we’ve been highlighting in the email@example.com non-mining economy since Q3 last year – post the pause in RBA rate cuts and +61-2-9324 3520 commercial bank out-of cycle hikes – may be losing steam. These indicators include recent weakness in the weekly consumer confidence and on-line SEEK job ads data, a renewed rise in consumer job insecurity, some reversal in the rise in consumer confidence about their own family finances, and industry data flagging a meaningful correction in new housing loans. These handful of indicators have certainly caught our attention, and increase the risk the economy may just need a little more 'monetary' help, given a restrictively high AUD and contracting fiscal impulse, to ensure it remains ‘mid range’ and on an even keel. While any policy change at the upcoming RBA April meeting looks very unlikely, whether the RBA feels inclined to provide that ‘help’ in May will depend critically on whether the unemployment rate is rising toward 5½% and (not 'or') underlying inflation print below the 0.625% quarterly pace implied in their forecasts. We continue to see the odds of both of these occurring as less than 50%. The Week Ahead: The RBA will likely hold, but a more dovish tone may raise speculation Data week: 2nd – 6th Apr of a rate cut. We expect resi approvals to recover modestly further, with prices flat. Retail sales probably grew modestly again. The trade balance will likely rebound to surplus. In Monday the US, ISM will be closely watched given softer regionals, while key payrolls should rise PMI (Mar) solidly given falling claims. Finally, China’s PMIs will be a focus given the ‘flash’ dropped. Building approvals (Feb) Chart 1: Despite low unemployment, consumers have become more worried… RBA commodity prices (Mar) 190 10 Index % Tuesday Consumer Unemployment expectations (LHS) 180 Retail sales (Feb) Unemployment rate (RHS) 9 RBA cash rate decision (Apr) 170 8 160 Wednesday PSI (Mar) 150 7 Trade balance (Feb) 140 130 6 Thursday Tourist arrivals (Feb) 120 5 Engineering Activity (Q4) 110 4 Friday 100 PCI (Mar) 90 3 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Source: ABS, Westpac, Melbourne Institute, UBS This report has been prepared by UBS Securities Australia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 11. Australian Economic Perspectives 30 March 2012 Cracks appearing in the RBA’s ‘trend’ economy? When the RBA left the cash rate unchanged in early March, it continued to refer In early March, the RBA continued to to Australia’s growth rate as “close to trend overall”, as it had done for refer to growth as “close to trend sometime. But last week, Governor Stevens sounded a little less sure, noting that overall”… while a number of factors “had” been leading them to conclude growth was trend, the GDP accounts – released post the March RBA meeting – were suggesting the economy was running “somewhat below trend over 2011”. Even …more recently the RBA has noted the as Treasurer Swan this week argued hard that tightening the fiscal accounts GDP accounts suggest growth was further to achieve a targeted surplus in 2012/13 was appropriate given an “somewhat below trend’ over 2011” economy “returning towards trend growth”, there continues to be ongoing uncertainty about just what is the current pace of the economy. We see the RBA as on-hold from here (though clearly with a risk they may trim We see the RBA as on-hold for now as the cash rate if unemployment rises enough). This reflects their view that the there’s too much on their ‘worry-wall’… global growth outlook is improving, and growth and inflation are ‘mid range’, but overlaid (in our view) with a long list of issues sticky-noted to their “worry- wall”, which are likely to make achieving their inflation target harder in the …enough of a rise in unemployment period ahead. These include limited capacity for lower unemployment and could bring them too the ‘rate-cut’ table higher wage growth, in an environment of rising industrial disputes and poorer productivity, while domestic inflation is close to 4% and the exchange rate’s disinflationary impact looks set to fade. This week we pull together a handful of the latest very-forward looking We pull together a handful of the latest indicators which flag the risk that the modest improvement we’ve been very-forward looking indicators which highlighting in the non-mining economy since Q3 last year – post the pause in flag the risk that the improvement RBA rate cuts and commercial bank out-of cycle moves – may be losing steam. we’ve highlighting in the non-mining Crack 1 – As shown in Chart 1, consumers’ ‘unemployment expectations’ economy maybe losing steam. jumped 3½% in March, following a 5% rise in February, to its highest level since August 2009. This recently rising trend is unusual given an unchanged unemployment rate over the past 7 months, and raises concern that rising job insecurity may drag on an already only moderate pace of consumer spending. Crack 2 – As shown in Chart 2, while recent job hiring indicators have been rising solidly (signalling no rise in unemployment ahead), our analysis of the series (due in about 10 days), returning to the negative prints that dominated the 2H11, prior to the strong rises in January & February. This may be early signs of Chart 2: Weekly SEEK data point to a fall in ANZ job ads… Chart 3: Roy Morgan flags another fall in consumer confidence 20 20 135 126 % m/m Index 123 16 16 120 130 Seek* Roy-Morgan consumer confidence monthly (LHS) 117 12 12 ANZ job ads Westpac/M.I. consumer sentiment (RHS) 114 125 8 8 111 108 120 4 4 105 102 0 0 115 99 96 -4 -4 110 93 -8 -8 Index 90 * 4 week moving average, UBS sa 105 87 May-10 Jan-10 Mar-10 Jul-10 Nov-10 Sep-10 Jan-11 Mar-11 May-11 Jul-11 Nov-11 May-12 Sep-11 Jan-12 Mar-12 -12 -12 Jun 08 Nov 08 Apr 09 Sep 09 Feb 10 Jul 10 Dec 10 May 11 Oct 11 Mar 12 Source: SEEK, ANZ, UBS Source: Roy Morgan, Datastream, Westpac, Melbourne Institute, UBS UBS 2 Australian Economic Perspectives 30 March 2012 a new weaker trend, consistent with the rise in consumers' unemployment expectations (see Crack 1) and recent company reports. Indeed, analysis of the recent slowing in jobs growth reveals a broad-based trend, with 7 of 14 sectors reaching new cycle low (as a y/y %) in February. Crack 3 – As shown in Chart 3, the latest weekly consumer confidence data from Roy Morgan flag a 3rd consecutive fall in the Westpac-Melbourne Institute (WMI) monthly measure of consumer confidence, continuing to unwind recent gains and threatening to return confidence to the lows of July/August last year. Crack 4 – Worryingly, the Roy Morgan survey highlights a further decline in consumers’ happiness about their own financial position in the period ahead. We have seen a similar drop-back in this question in the WMI survey, with the trend recovery since September last year key to our call that the consumer – absent a hawkish RBA, an avalanche of policy in 2011 around the flood, mining and carbon taxes, better offshore news and less momentum in petrol prices – will be in a better mood to modestly lift their spending through 2012. Crack 5 – Industry data for the banks point to a reversal of the improving trend These handful of softer indicators have in lending, with loans to owner-occupiers likely down significantly in the next caught our attention recently, lending data release (due in a couple of weeks, see Chart 5). A fall of this increasing the risk the economy may magnitude would reverse much of the uplift since early 2011 (although the need a little more 'monetary' help… improving trend in lending for new construction does appear intact). These handful of softer indicators have certainly caught our attention over the past month, and increased the risk that the economy may just need a little more …whether the RBA feels inclined to 'monetary' help, given a restrictively high AUD and contracting fiscal impulse, provide that 'help' in May will depend to ensure it remains ‘mid range’ and on an even keel. While any policy change critically on whether unemployment is this coming week at the RBA’s April meeting looks highly unlikely, whether the rising toward 5½% and (not 'or') the RBA feels inclined to provide that ‘help’ at its May meeting will depend underlying inflation prints below the critically on whether the unemployment rate is rising toward 5½% at the next 0.625% quarterly pace implied in the print mid April and (not ‘or’) the underlying inflation measures print below the RBA's forecasts 0.625% quarterly pace implied in the RBA's forecasts. We continue to see the odds of both of these occurring as being less than 50%, but will be keenly watching our key leading indicators to try and garner more clarity on just what is the near-term outlook for the economy, and the risks around that outlook. Chart 4: Key ‘family-finances’ confidence started to retreat… Chart 5: Industry data point to weaker lending next month 130 130 16 15 Index $bn - values ABS banks owner-occupier (LHS) 125 125 Cannex banks owner-occupier (RHS) 120 14 15 120 115 115 110 13 14 105 110 100 12 105 95 13 90 11 100 85 12 95 80 10 90 75 11 70 9 85 Family finances - year ahead (LHS) Index 65 Consumer confidence (RHS) $bn - values 80 60 10 8 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 2007 2008 2009 2010 2011 2012 Source: Westpac, Melbourne Institute, UBS Source: Cannex, ABS, UBS UBS 3 Australian Economic Perspectives 30 March 2012 Australian Economic Outlook Calendar Years (Year average % change) Fiscal Years (Year average % change) 2010 2011 2012 (f) 2013 (f) 2009/10 2010/11 2011/12 (f) 2012/13 (f) GDP FORECASTS GDP 2.5 2.0 3.2 3.7 2.3 2.0 2.8 3.6 Non-farm GDP 2.6 2.1 2.6 3.6 2.4 1.9 2.7 3.2 Farm Product -0.8 -0.1 12.8 7.3 -1.2 7.3 -1.5 13.0 Private Consumption 2.9 3.4 3.4 3.8 2.5 3.1 3.4 3.7 Dwelling Investment 4.1 1.1 -2.0 4.5 1.2 3.0 -2.8 3.1 Business Investment (underlying) -1.9 16.3 18.6 12.1 -5.6 5.6 21.9 15.0 - Equipment -1.1 11.7 9.5 7.0 -3.2 4.2 12.6 7.6 - Non-residential Construction -1.7 25.2 30.5 18.1 -8.1 9.6 36.5 23.4 Private Final Demand 2.0 5.6 6.2 5.8 1.0 3.4 6.6 6.1 Public Final Demand 8.7 -0.6 0.6 3.2 6.6 3.1 -1.4 2.7 Stocks (contribution) 0.4 0.4 0.1 0.1 -0.1 0.5 0.2 0.1 GNE 4.1 4.4 5.0 5.3 2.4 3.8 4.8 5.4 Exports 5.8 -1.6 5.4 7.6 5.3 0.2 3.4 6.2 Imports 14.1 11.6 12.5 13.4 5.6 10.4 13.2 13.6 Net Exports (contribution) -1.5 -2.7 -1.8 -1.8 -0.1 -2.0 -2.2 -2.0 Housing Commencements (‘000) 170 147 143 150 167 156 139 150 PRICES & LABOUR MARKET Headline CPI 2.8 3.4 2.7 2.7 2.3 3.1 2.8 3.0 RBA ‘underlying CPI’ 2.7 2.5 2.5 2.8 3.1 2.4 2.4 2.7 Wage Price Index 3.3 3.7 3.7 4.0 3.1 3.8 3.6 3.8 Employment 2.7 1.7 0.9 2.2 1.4 2.9 0.6 1.7 Unemployment Rate (at yr. end) 5.2 5.2 5.2 4.8 5.3 4.9 5.4 5.0 EXTERNAL SECTOR Current Account Balance ($billion) -38.5 -32.0 -60.4 -95.1 -56.2 -33.3 -40.0 -77.5 - as a % of GDP -2.8 -2.2 -4.0 -6.0 -4.3 -2.4 -2.7 -5.0 QUARTERLY FORECASTS Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 (f) Jun-12 (f) Sep-12 (f) Dec-12 (f) GDP (q/q) -0.3 1.4 0.8 0.4 0.6 1.0 0.9 1.0 (y/y) 1.2 2.0 2.6 2.3 3.3 2.9 3.0 3.6 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 (f) Jun-12 (f) Sep-12 (f) Dec-12 (f) Headline CPI (q/q, nsa) 1.6 0.9 0.6 0.0 0.7 1.0 1.4 0.1 (y/y, nsa) 3.3 3.6 3.5 3.1 2.2 2.3 3.1 3.1 RBA statistical core CPI (q/q, sa) 0.8 0.8 0.4 0.6 0.6 0.6 0.8 0.7 (y/y, sa) 2.4 2.7 2.6 2.6 2.4 2.2 2.6 2.7 RBA ‘underlying’ CPI (q/q) 0.8 0.8 0.5 0.5 0.6 0.6 0.8 0.7 (y/y) 2.3 2.6 2.5 2.6 2.4 2.2 2.5 2.7 FINANCIAL MARKET FORECASTS (end qtr) Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 (f) Jun-12 (f) Sep-12 (f) Dec-12 (f) - Cash 4.75 4.75 4.75 4.25 4.25 4.25 4.25 4.25 - 90 Day Bills 4.92 4.99 4.86 4.50 4.45 4.45 4.45 4.45 - 3yr Commonwealth Bonds 5.04 4.76 3.62 3.13 3.50 3.70 4.00 4.20 - 10yr Commonwealth Bonds 5.49 5.21 4.22 3.67 4.10 4.20 4.50 4.70 - ASX 200 4838 4608 4009 4057 4400 4500 4600 4700 Exchange Rates (end qtr): AUD/USD 1.036 1.073 0.974 1.025 1.050 1.000 1.025 1.050 AUD/EUR 0.730 0.740 0.726 0.790 0.808 0.800 0.854 0.913 AUD/JPY 85.8 86.4 75.1 78.9 84.0 85.0 87.1 89.3 TWI 76.3 77.8 72.4 75.8 76.0 73.1 74.9 77.4 Source: ABS, Datastream, UBS estimates UBS 4 Australian Economic Perspectives 30 March 2012 Australian Forecasts: What & Why? Recent forecast changes recovery, likely to lead to further sharp declines in stock On 9th March, following Q4 GDP, we ‘marked to market’ our markets and commodity prices, hitting confidence and jobs. GDP growth forecasts to 3.2% in 2012 (was 3.3%) and 3.7% Consumers ‘repent’ from their new-found caution, driving in 2013 (was 3.6%). spending and drawing down the saving rate. This would likely On 6th March, we modestly downgraded our housing starts see us reverting to a stronger growth profile, raising the risk forecast to 143k in 2012 (was 145k) and 150k in 2013 (was that the RBA hikes earlier than we expected. 152k). China’s slowdown turns out to be sharper than expected (with th On February 16 , following a surprisingly strong jobs report, policy slow to respond), undermining commodity prices, the we removed our May rate cut forecast and now expect the AUD, export demand, and potentially threatening some capex RBA to be on-hold for the remainder of 2012 (but still with the plans in the year ahead. risk of a rate cut on global uncertainty, a high AUD, or in Key Growth Signposts response to out-of-cycle bank rate hikes). Commodity price settlements, particularly given recent sharp “Bottom Line” on UBS Economic Forecasts falls in iron ore prices. Key to 2012 will be the extent to which Should catastrophe be avoided in Europe, we expect the prices rebound from here (which we expect they will). economy to pick-up to at least trend pace over the coming Leading indicators that signal ongoing demand for labour, year, driven by strong capex and exports (much more so than providing evidence that a significant rise in the unemployment housing and consumers). The key catalysts are the strong rate is unlikely. business investment outlook and a gradual recovery of the global economy. The post-floods reconstruction in Queensland Credit growth improving as an indicator of consumers and should provide an additional boost. business desire to re-lever, and credit bank funding availability. Inflation has moderated of late, and business surveys suggest further downward pressure in the near term. Underlying A sustained pick up in capital goods imports should signal the inflation looks to be running at 2½% or a bit below in 2H11. arrival of the long anticipated capex boom. We expect inflation to remain around the mid point of the Positions on Some Key Controversies target band in the next few quarters, before drifting up towards Don’t give up on the consumer – Retail trade has been dismal. the top of the 2-3% band in late 2012. But strong household cash flow, high savings, elevated The 50bp rate cuts in Nov and Dec should provide some confidence and a low unemployment rate provide scope for the support for interest rate sensitive sectors that have struggled consumer to regain a trend pace of growth over the coming thus far. Falling house prices, poor affordability, and some year. We nonetheless remain structurally bearish the retail negative wealth effects have leaned against both housing and subsector on a 2-3 year view, given structural shifts to online consumer spending. We expect consumption growth to recover and overseas travel amid a high AUD, and persistently rapid modestly through 2012, but not to an ‘above-trend’ rate. growth in services prices. Dwellings investment will probably contract modestly in 2012. The capex cycle is broader than just mining - While the Jobs growth has stagnated after a very strong period in 2H10. mining sector will do the bulk of investment over the coming The current soft jobs market looks likely to persist for a while couple of years, we expect some broadening out to other yet, and we think the unemployment rate will drift up to 5½% sectors. by mid-12. Nonetheless, we expect the jobs outlook to Credit growth will pick-up in 2012 - We look for credit growth improve, allowing the unemployment rate to drift lower to to pick-up to a 4-5% y/y system-wide pace in 2012, above its 5¼% by end-2012. current 3% pace. Key is the broadening of the capex cycle The AUD should remain supported, holding around 1.05 beyond mining, which should help business credit recover, though 2012, thanks in part to the shrinking pool of ‘AAA while stability of house prices should provide a ‘floor’ to stable’ assets, ongoing reserve diversification, and our housing credit growth. expectation for commodity prices to remain relatively strong in the next 1-2 years. Major Growth Risks A near term (GFC style) liquidity and funding crisis – the ongoing failure of political processes in Europe to calm markets appear to be pushing the world closer to an ‘end game’. This would have negative impacts on the global UBS 5 Australian Economic Perspectives 30 March 2012 Market trends Chart A: US 10 year bond yield Monetary policy: RBA – on hold, with risk of a cut 9 % 9 8 8 Cash: Following the recent falls in unemployment we no longer – on balance Fair Value range – see further RBA rate cuts, but rather that the easing cycle is most likely at 7 US 10yr bond yield 7 Fair value its end. We expect the RBA to look forward and ‘bank’ near term lower 6 6 inflation, unless a renewed jump in the unemployment rate suggest risks to 5 5 the outlook (or developments in Europe deteriorate sharply). Of course, we do still see a case for the RBA to further ease policy modestly near term to offset 4 4 higher bank lending rates (and potential credit rationing) and the tighter 3 3 monetary conditions due to a higher AUD. But we are now less convinced the 2 *2 RBA agrees. % 1 1 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Aussie 10yrs - staying expensive…target 4¼% mid 2012 US 10yrs: The US 10yr yield fell sharply through 2% on US and Euro debt Chart B: Aussie 10 year bond yield crisis worries, and the ‘new’ Fed’s commitment to keep the funds rate near 13 13 zero until late 2014. Recent US data has been broadly consistent with 2%-3% 12 12 fair value range GDP growth, not a double-dip recession. While Euro risks will keep yields 11 11 Actual Aussie 10 year bond yield near 2%, 10-year treasuries look expensive on a ‘no double dip scenario’, we 10 10 Fair value target 2½% by end-2012 (Chart A). 9 9 Aussie 10yrs: Aussie 10-year yields (Chart B) have collapsed in line with 8 8 % % their global peers, to around 4%, well below ‘fair value’ at end 2011, 7 7 assuming some ongoing fiscal consolidation. Given likely stress around 6 6 Europe, we see yields remaining around 4%-4¼% into mid 2012. We target a 5 5 rise to 4¾% end 2012, as global and domestic growth regains a firmer * 4 4 footing, and credit event risks are less prevalent (while strong offshore 3 3 demand keeps Aussie bonds well bid). 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Aussie 3yrs - more expensive…rising over 4% in 2012 Chart C: Aussie 3 year bond yield Aussie 3 years: Our model suggests 3-years (Chart C) are trading expensive 11 11 – driven by expectations for RBA rate cuts. Given our expectation that the 10 10 RBA will at best only cut a further 25bp over coming months (UBSe ‘on 9 Fair value range 9 Actual Aussie 3 year bond yield hold’), we target 3¾% mid 2012, rising to 4¼% end 2012, as growth firms Fair value 8 8 and risk aversion eases. 7 7 % % Yield Curve - staying around 50bp, before 2H12 bias to flatten 6 6 Yield curve: The curve has bull-steepened as rate cut expectations dominate. 5 5 Looking ahead, we see the curve staying little changed around 50bp over 4 *4 coming months, as rate cut expectations and crisis fears remain. For 2H12, we 3 3 see both short and longer dated yields rising, and the curve flattening toward 2 2 40, before flattening to 20bp in 2013.. 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 Aussie - US 10yr spread returns to over 200bp Chart D: AU-US 10yr Spread Aussie-US spread: Fears of a deeper EU crisis – and strong demand from 800 AU-US 10 year spread - fair value model offshore – saw the yield on AUD bonds drop below 4%, sending the spread to 700 US treasuries below 200bp. This has reversed as AUD 10yrs have sold off 600 Fair value range more than US treasuries. We look for the spread to remain above 200bp as Actual spread 500 Aussie economic growth outperforms US, and RBA remains more hawkish Fair value basis points 400 than the FOMC over the rest of the year. 300 Source for text and charts: Bloomberg, DataStream, UBS; * UBS forecasts 200 100 0 -100 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 UBS 6 Australian Economic Perspectives 30 March 2012 The Week in Review: 26th – 30th March The RBA FSR said global market sentiment improved noticeably, largely reflecting the ECB LTRO greatly reducing funding risks for Euro banks, and gradual progress to enhance fiscal governance and deal with Greece’s sovereign debt problems. Data was generally positive. Job vacancies bounced modestly, implying jobs growth should be less weak. Credit grew a tick above than expected, the best since September. New home sales bounced, after plunging. In the US, Bernanke was cautious on the labour market, citing recent jobs growth may have reflected ‘catch-up’, though jobless claims are still trending down. Both pending home sales and CB consumer confidence edged back, but are still trending up. S&P/CS home prices were flat, after declining. Durables rebounded from early quarter weakness, though March regional PMIs fell, suggesting slower growth. In Europe, the German ifo held its recent rebound. In the week to noon, the ASX200 rose 2.2% to a near 8-month high of 4350, the AUD/USD eased 0.2% to around a 2½ month low of 1.039, while 10 year yields dropped 22bp to 4.08%. Vacancies imply jobs growth should be less weak RBA Assistant Governor Debelle said that a change in the composition of 50 5.0 capital flows may have affected the AUD, but it is hard to judge the impact. % y/y ABS job vacancies (LHS, adv 2 qtrs) % y/y 4.5 The RBA semi-annual Financial Stability Review said “global market 40 Jobs growth (RHS) 4.0 sentiment improved noticeably”, largely reflecting the ECB LTRO “greatly 30 3.5 [reducing] funding risks for European banks”, plus “gradual progress” to 20 3.0 enhance “fiscal Governance and dealing with Greece’s sovereign debt problems”. Also, US data is “more positive, somewhat allaying fears about a 10 2.5 global growth slump”. While Euro bank funding pressures “eased”, “spreads 2.0 0 are still fairly high” and “ongoing difficulties” and the “subdued” global 1.5 outlook pose risks to global financial stability. The RBA found that large bank -10 1.0 profits remain “robust”, with ‘broadly average’ ROE’s. While “slow credit” -20 could constrain future profit growth, it would be “unhelpful” to “chase 0.5 -30 0.0 unrealistic expectations by taking on more risk – through lowering credit 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 standards” or expanding too quickly into new markets. The RBA assessed households as continuing to have “more caution” towards their finances in New home sales bounced, albeit after plunging recent years, but this improved “resilience” to possible shocks. Meanwhile, 10.0 17 the RBA said business conditions continue to “vary significantly” by industry. HIA newly erected home sales (LHS*) 9.5 16 Overall, the RBA gave little guidance on rates, as we expected. ABS private residential building approvals (RHS**) 15 9.0 ABS job vacancies bounced by a modest 0.7% q/q in February, only partly 14 8.5 offsetting a 3.4% drop last quarter. This improved the y/y pace to -4.1%, 13 8.0 albeit from -6.3% – which was the weakest in a decade. Overall, data still 12 suggest that jobs growth should be less weak than its current pace of broadly 7.5 11 flat. 7.0 10 6.5 Private credit grew a tick above expected at 0.4% m/m in February – the 9 fastest since Sep-11 – after a modest 0.2% gain in January. However, the y/y 6.0 8 000s *HIA sample of 100 builders in largest 5 States pace held at 3.5%. The rise was broad-based across housing (0.4% after 0.5%, ** ABS total 000s 5.5 7 04 05 06 07 08 09 10 11 12 albeit the y/y held a record low of 5.3%), business (0.4% after -0.2%, 1.2% y/y), and personal (0.3% after -0.2%, but still -1.1% y/y) Credit grow ticked up 0.4% (albeit still 3.5% y/y) HIA's sample of newly erected home sales bounced by 3.1% m/m in 21 2.1 % Total m/m (RHS) Total y/y (LHS) % February, albeit after plunging by 7.3% m/m. This saw a moderation of the 18 1.8 y/y fall to -18.2%, from -20.1% last month. 15 1.5 12 1.2 9 0.9 6 0.6 3 0.3 0 0.0 -3 -0.3 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: ABS, RBA, HIA, UBS UBS 7 Australian Economic Perspectives 30 March 2012 The Week Ahead: 2nd – 6th April In a holiday-shortened week, the RBA (Tue) will likely hold rates for a third meeting, but a more dovish tone could increase speculation of a rate cut in May (if unemployment rises and inflation eases). We expect a housing turning point, with residential approvals (Mon, +1.0%) recovering modestly further, and prices (Mon) flat. Retail sales (Tue, 0.3%) probably grew modestly again. However, the trade balance (Wed, $1.5bn) will likely rebound into a surplus. In the US, the ISM (Mon) will be closely watched given softer regionals, and EU and Chinese PMIs, while the non-manufacturing ISM (Wed) is also out. Key payrolls data (Fri) should show a solid rise, given falling claims. The FOMC minutes are also due. Elsewhere, Chinese PMIs (Sun) will be a focus given the ‘flash’ dropped. The ECB (Wed) and BoE (Thu) are expected to hold rates. Canada’s PMI and labour market are also updated. Data and Events Date Time (AEDT) Data/Event UBS Market Previous 2/4/6 Apr 9:30 PMI/PSI/PCI (Mar) nf nf 51.3/46.7/35.6 2 Apr 11:30 RPData-Rismark dwelling prices (Mar) 0.0% nf +0.8% 2 Apr 11:30 Residential building approvals (Feb) +1.0% +0.3% +0.9% 2 Apr 16:30 RBA $A commodity prices (Mar) nf nf -1.3% 3 Apr 11:30 Retail sales (Feb) +0.3% +0.3% +0.3% 3 Apr 14:30 RBA cash rate decision (Mar) 4.25% 4.25% 4.25% 4 Apr 11:30 Trade balance (Feb) +$1.5bn +$1.0bn -$0.7bn 5 Apr 11:30 Engineering activity (Q4) - - - Source: ABS, Bloomberg, RBA, Reuters, Dow Jones, Mkt is preliminary Retail sales likely remained sluggish* PMI/PSI/PCI (Mar) 9 9 The ‘UBS all-economy PMI’ retraced in February to 45.9 to a 1- % 8 m/m 8 year low. We expect March to bounce, but a weak print would be y/y 7 7 a negative sign for future growth (and the NAB business survey). 6 6 5 5 Building approvals (Feb) 4 4 Better home builder surveys, lending and sentiment suggest that 3 3 residential building approvals should recover another 1% in 2 2 February – albeit to a still weak 138k annualised pace. Meanwhile, 1 1 non-residential will likely plunge after a (hospitals) spike. 0 0 -1 -1 RPData-Rismark dwelling prices (Mar) % -2 -2 After capital city dwelling prices fell over 5%, amid support from 07 08 09 10 11 12 RBA rate cuts, February prices showed a modest 0.8% m/m recovery. We look for further stability with a flat result in March. Export rebound to lift trade to a $1.5bn surplus 4 34 $bn Trade balance (LHS) Retail sales (Feb) 3 Imports (RHS) 31 Exports (RHS) We expect retail sales (values) to continue modest growth in 2 28 February, with another 0.3% m/m gain (though the y/y drops to 2.2% from 2.7%). Ongoing food price deflation remains a drag. 1 25 0 22 RBA cash rate decision (Apr) -1 19 While the RBA still has a (modest) easing bias – saying at their last meeting that rates are appropriate for the moment, we expect -2 16 them to hold again. However, key will be if there is a more dovish -3 13 tone post Q4’s weaker GDP print, which could open the door to a $bn rate cut in May (post jobs and Q1 CPI data). -4 10 00 01 02 03 04 05 06 07 08 09 10 11 12 Sources: ABS, UBS * February forecasts shows Trade balance (Feb) After January’s trade balance surprisingly hit a $0.7bn deficit, we expect a sharp rebound to a $1.5bn surplus in February. The key driver is a recovery in ‘bulks’ exports post Chinese New Year, and ‘normal’ gold exports which plunged (more than offsetting lower export prices) – as well as the already reported drop of imports. UBS 8 Australian Economic Perspectives 30 March 2012 Australian Economic Calendar: March/April MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY ------- 26 Mar ------- ------- 27 Mar ------- ------- 28 Mar ------- ------- 29 Mar------- ------- 30 Mar------- US PENDING HOME SALES (Feb) US S&P/CS-20 HOME PRICE (Jan) US DURABLE ORDERS (Feb) AU ABS JOB VACS. (Feb qtr) AU PRIVATE CREDIT (Feb) Act: -0.5%, Pre: +2.0% Act: 0.0%, Pre: -0.5% Act: +2.2%, Pre: -3.6% r Act: +0.7, Pre: -3.4% r Act: +0.4%, Pre: +0.2% GE IFO BUS. CLIMATE (Mar) US C.B. CONS. CONF. (Mar) US DURABLES EX-TRANS. (Feb) US GDP (Q4 ar, 3rd est.) AU HIA NEW HOME SALES (Feb) Act: 109.8, Pre: 109.7 r Act: 70.2, Pre: 71.6 Act: +1.6%, Pre: -3.0% r Act: +3.0%, Pre: +3.0% Act: +3.1%, Pre: -7.3% NZ TRADE BALANCE (Feb) UK MORTGAGE APPROVAL (Feb) US PERSONAL INCOME (Feb) Act: +$161mn, Pre: -$159mn r RBA FIN. STABILITY REVIEW Act: 49.0k, Pre: 57.9k r UBS: +0.3%, Pre: +0.3% NZ OWN ACTIVITY O’LOOK (Mar) US CHICAGO PMI (Mar) BERNANKE SPEECH Act: 38.8, Pre: net +31.2% UBS: 62.0, Pre: 64.0 “A view from the Federal Reserve” US U. MICH CONS CONF (Mar f) UBS: 75.5, Pre: 74.3 US PERSONAL SPENDING (Feb) UBS: +0.6%, Pre: +0.2% JN CORE CPI (Feb, y/y) Act: +0.1%, Pre: -0.1% NZ DWELLING CONSENTS (Feb) Act: -6.7%, Pre: +8.1% r NZ HOUSEHOLD CLAIMS (Feb) Act: +0.1%, Pre: +0.1% ------- 2 Apr ------- ------- 3 Apr ------- ------- 4 Apr ------- ------- 5 Apr ------- ------- 6 Apr ------- AU BUILDING APPROVALS (Feb) AU RETAIL SALES (Feb) AU TRADE BALANCE (Feb) AU TOURIST ARRIVALS (Feb) AU PCI (Mar) UBS: +1.0%, Pre: +0.9% UBS: +0.3%, Pre: +0.3% UBS: +$1.5bn, Pre: -$0.7bn UBS: nf, Pre: +2.1% UBS: nf, Pre: 35.6 AU PMI (Mar) US FACTORY ORDERS (Feb) AU PSI (Mar) AU ENGINEERING ACTIVITY (Q4) US NON-FARM PAYROLLS (Mar) UBS: nf, Pre: 51.3 UBS: +1.8%, Pre: -1.0% UBS: nf, Pre: 46.7 UK IP (Feb) Mkt: +210k, Pre: +227k AU RP-R HOUSE PRICE (Mar) NZ ANZ COMM. PRICE (Mar) US ISM NON-MFG (Mar) UBS: +0.1%, Pre: -0.4% US PRIVATE PAYROLLS (Mar) UBS: +0.0%, Pre: +0.8% UBS: nf, Pre: 0.0% Mkt: 56.7, Pre: 57.3 GE IP (Feb) Mkt: +223k, Pre: +233k AU RBA AUD COMM. PRICE (Mar) UBS: -0.2%, Pre: +1.6% US UNEMPLOYMENT RATE (Mar) UBS: nf, Pre: -1.3% ECB DECISION CA UNEMPLOYMENT RATE (Mar) Mkt: 8.3%, Pre: 8.3% US ISM MANUF. (Mar) RBA DECISION (Apr) UBS & mkt: on-hold, Pre: 1.00% Mkt: 7.4%, Pre: 7.4% US AVG. HOURLY EARNING (Mar) Mkt: 53.4, Pre: 52.4 UBS & mkt: on-hold, Pre: 4.25% CA EMPLOYMENT (Mar) Mkt: +0.2%, Pre: +0.1% CH OFFICIAL PMI (Mar) FOMC MINUTES (Mar) Mkt: +12.5k, Pre: -2.5k GOOD FRIDAY PUBLIC HOLIDAY Mkt: 50.6, Pre: 51.0 (Due 1st) CA PMI (Mar) Markets closed CH HSBC PMI (f, Mar) UBS: nf, Pre: 66.5 UBS: nf, Pre: 49.6 (Due 1st) BOE DECISION JN TANKAN (Q1) UBS & mkt: on-hold, Pre: 0.50% UBS: +5, Pre: -4 ------- 9 Apr ------- ------- 10 Apr ------- ------- 11 Apr ------- ------- 12 Apr ------- ------- 13 Apr ------- CH CPI (Mar, y/y) AU NAB BUS. CONDITIONS (Mar) AU HOUSING FINC. (ex-refi, Feb) AU EMPLOYMENT (Mar) US CPI (Mar) Pre: +3.2% Pre: +3.0 Pre: -2.9% Pre: -15k Pre: +0.4% CH PPI (Mar, y/y) AU NAB BUS. CONFIDENCE (Mar) AU OWNER OCCUPIER NO. (Feb) AU UNEMPLOYMENT RATE (Mar) US CORE CPI (Mar) Pre: 0.0% Pre: +0.9 Pre: -1.2% Pre: 5.2% Pre: +0.1% AU ANZ JOB ADS (Mar) AU CONSUMER CONF. (Apr) US PPI (Mar) US UofM CONS. CONF. (Apr) EASTER PUBLIC HOLIDAY Pre: +3.3% Pre: -5.0% Pre: +0.4% Pre: 74.3 Markets closed CH TRADE BALANCE (Mar) US FED BEIGE BOOK IN IP (Feb y/y) CH GDP (Q1, y/y) Pre: -$31.5bn CH NEW YUAN LOANS (Mar) Pre: +6.8% Pre: +8.9% CH EXPORTS/IMPORTS (Mar, y/y) Pre: 711bn NZ PMI (Mar) CH IP (Mar, y/y) Pre: +18.4%/+39.6% NZ EXP’ TRADING ACT. (Q1) Pre: 57.7 Pre: +11.4% NZ QV RESI VALUEMAP (Mar) UBS: net +20%, Pre: net +13% NZ ELECT. CARD TRANS. (Mar) Pre: +2.9% y/y Pre: -0.3% BOK DECISION BOJ DECISION NZ ANZ-RM CONS. CONF. (Apr) Pre: 3.25% UBS: on-hold, Pre: 0-0.1% Pre: 110.2 ------- 16 Apr ------- ------- 17 Apr ------- ------- 18 Apr ------- ------- 19 Apr ------- ------- 20 Apr ------- US RETAIL SALES (Mar) AU CAR SALES (Mar) AU BUILDING ACTIVITY AU CONSTRUCTION ACTIVITY AU GOODS EXPORT PRICE (Q1) Pre: 1.1% Pre: 0.0% UK UNEMPLOYMENT RATE (Feb) AU MERCHANDISE IMPORT (Mar) Pre: -1.5% US EMPIRE MFG (Apr) NZ REINZ HOUSE PRICE (Mar) Pre: 8.4% Pre: -4.5% AU GOODS IMPORT PRICE (Q1) Pre: 20.2 Pre: +0.8% BOE MINUTES (Apr) AU NAB BUS. COND/CONF (Q1) Pre: +2.5% US HOUSING MKT INDEX (Apr) GE ZEW (Apr) Pre: +1.7/+1.3 Pre: 28 Pre: 37.6 NZ CPI (Q1) NZ PSI (Mar) US HOUSING STARTS (Mar) UBS: +0.5%, Pre: -0.3% Pre: 55.5 Pre: -1.1% US PHILLI FED (Apr) NZ FOOD PRICES (Apr) BOC DECISION Pre: 12.5 Pre: +0.6% Pre: 1.00% US EXIST HOME SALES (Mar) RBA MINUTES (Apr) Pre: -0.9% UBS: UBS Forecast Pre: Previous Release Act: Actual Mkt: Market a: advanced r: revised p: preliminary f: final Note: Release dates are subject to change UBS 9 Australian Economic Perspectives 30 March 2012 Global Economic Analysts Larry Hatheway +44-20-7568 4053 firstname.lastname@example.org Chief Economist & Head of Asset Allocation Global Economics Paul Donovan +44-20-7568 3372 email@example.com Senior Global Economist Andrew Cates +44-20-7568 6892 firstname.lastname@example.org Senior Global Economist Ramin Nakisa +44-207 567 6861 email@example.com Asset Allocation Sophie Constable +44-20-7568 3105 firstname.lastname@example.org Global Database Manager Lucy Coomer +44 20-7568 3217 email@example.com Administrative Assistant George Magnus +44-20-7568 3322 firstname.lastname@example.org Senior Economic Adviser US Maury Harris +1-203-719 7301 email@example.com Chief Economist US Drew Matus +1-203-719 8378 firstname.lastname@example.org Senior Economist Samuel Coffin +1-203-719 1252 email@example.com Economist Kevin Cummins +1-203-719 1676 firstname.lastname@example.org Economist Jessy Moya +1-212-713 2471 email@example.com Administrative Assistant Canada George Vasic +1-416 3502 232 firstname.lastname@example.org Senior Economist Garry Cooper +1-416 3502 252 email@example.com Strategist Europe Stephane Deo +44-20-7568 8924 firstname.lastname@example.org Chief Economist Europe Amit Kara +44-20-7568 3522 email@example.com UK Martin Lueck +49-69-1369 8280 Martin.firstname.lastname@example.org Germany, ECB, Scandinavia Reto Huenerwadel +41-1-239 6178 email@example.com Switzerland Matteo Cominetta +44-20-7567 4652 firstname.lastname@example.org European Economist Japan Takuji Aida +81 3 5208 7474 email@example.com Senior Economist Cameron Umetsu +81-3-5208 7344 firstname.lastname@example.org Senior Economist Daiju Aoki +81-3-5208 7454 email@example.com Economist Australasia Scott Haslem +61-2-9324 3663 firstname.lastname@example.org Chief Economist Australasia Robin Clements +64-3-358 9150 email@example.com Senior Economist (NZ) George Tharenou +61-2-9324 2189 firstname.lastname@example.org Senior Economist (AU) Asia (ex Japan) Duncan Wooldridge +852-2971 6046 email@example.com Head of Asian Economics, Korea Tao Wang +86 10 5832 8922 firstname.lastname@example.org China Philip Wyatt +852-2971 8135 email@example.com India, Pakistan, Vietnam Edward Teather +65 6495 5965 firstname.lastname@example.org ASEAN Silvia Liu +852-2971 8121 email@example.com Hong Kong, Taiwan Jun (Steven) Zhang +86 213 8668 613 firstname.lastname@example.org China Harrison Hu +86 10 5832 8847 email@example.com China Amy Tang +852-2971 8461 firstname.lastname@example.org Statistician Isabella Leung +852-2971 8193 email@example.com Administrative Assistant Latin America Javier Kulesz +1-203-719 1603 firstname.lastname@example.org Latin America Andre Carvalho +55-11-3513 6522 Andreemail@example.com Brazil Economics Rafael de la Fuente +1-203-719 7127 Rafael.firstname.lastname@example.org Mexico Economics EMEA Reinhard Cluse +44-20-7568 6722 email@example.com Senior EMEA Economist Jennifer Miller (previously Aslin) +44-20-7568 6585 firstname.lastname@example.org Junior Analyst Marie Antelme +27-21-431 8649 email@example.com South African Economist Gyorgy Kovacs +44-20-7568 7563 firstname.lastname@example.org Economist Currency Strategy Mansoor Mohi-Uddin +44-20-7567 2472 email@example.com Head, FX Strategy Bhanu Baweja +65-836 5287 firstname.lastname@example.org FX Strategist Fixed Income Strategy Michael Schumacher +1-203-719-9004 Michael.email@example.com Head, Rates Strategy Chris Lupoli +44-20-7567 7589 firstname.lastname@example.org Fixed Income Strategist Matthew Johnson +61-2-8121 5907 email@example.com Fixed Income Strategist, Australia Justin Knight +44-20-7568 8450 firstname.lastname@example.org EMEA Rates Strategist UBS 10 Australian Economic Perspectives 30 March 2012 Analyst Certification Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner, including with respect to UBS, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. 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"UBS - Cracks appearing in RBA’s ‘trend’ economy"