Rob welcome back. A lot has happened in financial markets over the last couple of months. What do you make of the rebound – irrational exuberance all over again?
Rob Henderson: Look I don’t think its irrational exuberance. I think it’s more than normal operation of the stock market which normally anticipates an upturn in the U.S. economy by around two to three quarters. So our forecast for some time has been an increase in U.S. GDP either from very late this year or early next year. If that forecast can come off, stock markets should be rising from around about the end of the March quarter. That’s what we’ve seen, and whilst you might call the jump we’ve seen so far quite large, nonetheless you will anticipate some upturn. So that might mean that from here on things track sideways a little, but to us the timing you know is very coincidental with the coming recovery.
Clive Tompkins: First quarter GDP was up point four of a per cent, after a fall of half a per cent the previous quarter, this looks like the economy is on the mend. Is this your assessment?
Rob Henderson: Look it’s not really our assessment and whilst we would agree that GDP which is actually a measure of output in the economy, rose by point four, nonetheless if you look at the value of that output, which economists refer to as nominal GDP, it actually fell by point 6 per cent. And the difference between those two measures was effectively a one percentage point drop in the value of Australia’s output. Now that is an interesting observation, because it’s a very unusual one and it means that, and I think the reason why that happened was because exporters actually dropped their prices in the first quarter of 2009. That meant that their volumes held up but of course the value dropped dramatically and it’s that drop in value which means that they earned less income. So if you like you can say Australia avoided a recession in real output, but I would counter that by saying in terms of the value of that output, in fact the last two quarters; the December quarter and the March quarter, actually went backwards. Now to most people that would be a recession - a fall in income for two quarters in a row.
Clive Tompkins: Despite the optimism in financial markets, many forecasters are still predicting unemployment will rise significantly by the middle of next year. Given the positive run in data, are we missing something?
Rob Henderson: Not really, and that’s because even if the economy was growing quite slowly, we don’t expect that’s going to continue we actually see more negative quarters in the next couple of quarters. And then we see a recovery starting form late this year, early next year. Even when the recovery starts, it’s going to be a very weak recovery. Now the problem with the weak recovery is that the economy is not growing faster enough to generate enough jobs to soak up the new people coming into the workforce every month as a result of population growth. We actually need three percent annualised GDP growth in this economy to stop unemployment rising. In out forecast that doesn’t happen until the second half of 2010. That’s why even though we have the recovery starting from late this year, early next year, unemployment keeps rising out towards the end of 2010 to a peak of near eight percent by the time we get out there.
Clive Tompkins: And Rob has NAB made any changes to its forecasts?
Rob Henderson: We have made a small change to our forecast because of the stronger GDP number for the first quarter of the year. That has the base affect on the entire year, so for 2009 as a whole we did expect the economy to show a drop of one percent in GDP, now we think it’s more like half a percent because of the stronger result for the first quarter, but otherwise not at all. The economy’s still in recession for most of this year, unemployment rising in 2010.
Clive Tompkins: And the RBA kept rates on hold last week as expected. Are they done?
Rob Henderson: Look we think they’re either done or there could be a couple more 25’s dribbled out. There’s is plenty of room for more interest rate cuts here if the Reserve Bank needs to do anymore. We think that they’re giving the markets a very strong signal that they hope they’ve done enough. Now with unemployment rising and inflation likely to fall to the bottom of the RBA’s two to three percent target band or below it, We still think there’s quite a good chance there’s a couple more there. So you know we would see the bottom in the cash rate as two and a half percent perhaps, but it could be that the Reserve Bank is actually finished here at three per cent.
Clive Tompkins: Rob last question. The Aussie dollar is around 80 cents, is parity back on the radar given our comparatively robust economy, yield advantage, and the return of the Japanese’s house wife as a force in FX markets?
Rob Henderson: Look we don’t see parity as back on the radar, in fact we think at the moment the currency is looking like its overvalued. We would agree that the currency should be higher than it once was six months or so ago because we have seen stronger commodity prices, we’ve seen a pick up in the stock market, we’ve seen an increase in the appetite for risk, and your Japanese households are part of that indication of a stronger appetite for risk. We’ve seen a higher gold price, which has been important in the last 12 months for the Australian dollar, so we put all of those things together and we put them in a model and that says yes, the currency should be higher, but not over 80 cents, more like 74 – 75 cents. So at the sort of high 70’s lower 80’s levels to us the currency’s basically been over bought. It’s not clear what might trigger a pull back, but we would say at those levels the currency looks quite expensive on the fundamentals.