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  • Published: 2012-12-04
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In view of the stronger-than-expected employment situation in Australia, together with the ongoing strength in the commodity bull market, we are now pencilling in 2.4% overall real GDP growth for the country in 2011, from 1.6% previously. With the improvement in Australia's economic outlook, we
are now only pencilling in a single 25 basis point (bp) reduction in the cash rate to 4.50% by end-2011 (from three 25bp cuts to 3.75% previously). Our view that the property slump will dominate the economic landscape remains intact.

Australia's unemployment rate came in at 5.2% (seasonally adjusted) in November, improving from the 5.4% figure recorded in the preceding month. While the headline unemployment numbers is largely in line with our end-2010 forecast of 5.1%, we were surprised by the strong participation rate, which spiked to 66.1% in November, from 65.9% in October. This shows that the Australian economic recovery is sufficiently robust to absorb the increasing number of jobseekers, compelling us to reassess our bearish outlook for the economy in 2011.

Strong Momentum To Persist For Now

A closer look into the employment numbers reveal that the addition of new jobs were not limited to 'hot spots' such as the mining state of Western Australia, but included urban areas as well. Indeed, Western Australia saw its unemployment rate decline to 4.5% in November from 4.7% previously on the back of strong demand in the mining sector. Yet New South Wales also recorded a significant improvement, as its jobless rate fell to 5.1% in November from October's 5.4%. In tandem, Victoria registered a drop in unemployment rate, to 5.5% in November from 5.6% in the preceding month. The broad-based improvement in employment situation bolsters the case that Australia may register stronger private consumption growth in H111, and as such we have revised our forecast upwards to 2.5% for the whole of 2011, from 1.8% previously.

Apart from stronger local economic fundamentals, we believe Australia's growth will benefit from better US performance, as a result of the extension of tax cuts and possible continued inflows due to additional quantitative easing. With this in mind, we are pencilling in export growth of 4.1% in 2011, stronger than our initial forecast of 3.1%.

 In all, we are now projecting a firmer 2.4% headline real GDP expansion in 2011 (revised upwards from
1.6% previously), slower than the 2.8% growth projected for 2010. In particular, we highlight that our upgraded forecast for Australia is still below general consensus, as we still believe investment growth will falter next year. Indeed, the Australian Industry Group Performance of Construction Index in November declined by a seasonally-adjusted 1.8 points to 42.2 (any point below 50.0 suggests contraction). As the effect of the government's fiscal stimulus measures wanes without a commensurate rise in private investments due to higher interest rates, the slowdown in capital formation should have a dampening effect on overall economic expansion next year.

4.75% Cash Rate Maintained As Expected
In its monetary policy meeting on December 7 (the final one for 2010), the Reserve Bank of Australia (RBA) maintained the cash rate at 4.75%. The central bank's decision was in line with our expectations, as we believe the previous rate hike in November - in which the RBA raised the benchmark rate by 25 basis points (bps) from 4.50% to 4.75% - will be effective in countering the potential rise in inflationary pressures in H111. To be sure, the TD Securities Melbourne Institute Inflation gauge recorded a 0.4% month-on-month (m-o-m) increase in November, accelerating from the 0.3% increase in October. The bulk of the inflation was due to higher prices of agricultural products such as fruits and vegetables, while prices of discretionary goods such as audio-visual equipment remained sluggish. Due to significant crop damage following the December floods in New South Wales, cost-push inflation may lead to higher average inflation of 2.9% in 2010, as compared to 1.8% in 2009.

By H211, however, we believe monetary easing will still be necessary, as disinflation should set in once cost-push pressures subside, given that consumer demand should weaken further. Even before the surprise November hike, retail sales fell by 1.1% m-o-m (seasonally-adjusted) in October from a 0.1% rise in September. As real estate prices are expected to remain weak - as evidenced by the 3.8% and 1.6% fall in house values over the July-October period in Perth and Brisbane respectively, based on RP Data-Rismark figures - retail performance should continue to weaken, curtailing inflationary pressures. As such, we believe the average inflation for 2011 will be much lower, coming in at 1.2%.

With this in mind, we believe the RBA will reduce the benchmark rate by a single 25bp cut to 4.50% by the end of 2011, a smaller decrease when compared to our previous forecast of 3.75%. This is in line with the improvement in our near-term growth outlook for Australia.

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