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Philip Lowe, assistant governor to the RBA, said this morning that the Australian economy was in a reasonably solid upswing. Mr Lowe said however that the nature of the upswing would start to shift from public sector driven, through government stimulus packages, to a more private sector led recovery.

Speaking at the Australian Industry Group 10th Annual Economic Forum Mr Lowe said that public sector would decline as such investments as the Building Education Revolution tapered off, while improving Terms of Trade and higher commodity prices for the miners in particular would underpin private sector growth.

Refering to the housing market, Mr Lowe acknowledged that most indicators, such as clearance rates, pointed a buoyant property sector, however he cautioned that that was not the entire picture.

”Total housing loan approvals declined in October, November, December and January, with the declines broader than just for first-home buyers following the scaling back of the additional grants,” Mr Lowe said.

Commenting on the last six months, Mr Lowe recent data was on the firm side.

”Employment growth has been robust, business and consumer confidence is above average, the housing market has been strong, and there are signs that the period of business deleveraging is coming to an end,” Mr Lowe said.

Inflation, he said, would moderate, and was expected to be around 2.5% by the end of the year.

The inflation would be pegged back by the combined effects of slowing wage in growth, discounting amongst the retailers, and importantly more interest rate rises.

”In addition, as the Bank has noted a number of times, with the economy having relatively limited spare capacity, it is likely that interest rates will need to continue their gradual move towards more normal levels.”

Bringing his speech to a close Mr Lowe said that the flow-on effect from the GFC would continue to affect the economy.

”While we need to watch these flow-on effects carefully, the outlook for Australia appears to be considerably brighter than that for most other advanced economies,” Mr Lowe concluded.

Credit Suisse lowered its recommendation on ORI (NEUTRAL, price target $29.35) despite remaining positively disposed towards the company. The Swiss broker said the downgrade reflected a number of negative one-off items and recent share price strength.

Credit Suisse pointed to the environmental provision for the Botany remediation, which is to take place over the next year, the Hexachlorobenzene provision and the Pharmaceuticals tax case.

Despite these “below the line” issues, as well as the recent run in Orica’s share price, the broker believes earnings growth is set to continue as Australian and Indonesian mining volumes remain robust.

The key uncertainty for the group is around the speed and extent of recovery in the US.  

Credit Suisse lowered its recommendation on ORI (NEUTRAL, price target $29.35) despite remaining positively disposed towards the company. The Swiss broker said the downgrade reflected a number of negative one-off items and recent share price strength.

Credit Suisse pointed to the environmental provision for the Botany remediation, which is to take place over the next year, the Hexachlorobenzene provision and the Pharmaceuticals tax case.

Despite these “below the line” issues, as well as the recent run in Orica’s share price, the broker believes earnings growth is set to continue as Australian and Indonesian mining volumes remain robust.

The key uncertainty for the group is around the speed and extent of recovery in the US.  

New Zealand reported today seasonally adjusted current account balance deficit of $3.1 billion for the December quarter, a swing from a $39 million surplus in the prior quarter – the first such surplus posted in more than 20 years. The swing from a surplus to a deficit was driven by an increase in income earned by foreign investors from their New Zealand investments, Statistics New Zealand said.

The result is worse than analysts’ consensus and is likely to put more pressure on the New Zealand central bank to keep interest rates at 2.5% – a figure that has remained steady for the last eight months, and something they have already indicated they would do until at least mid-2010.

The result also means that New Zealand investors are more likely to invest in Australia’s debt market where the Australian Reserve Bank looks likely to continue raising interest rates in the short term above the current level of 4%.

The New Zealand central bank is also faced with higher unemployment, currently sitting around 7.3%, easing inflationary pressures.

In the fourth quarter CPI actually fell 0.2%.

Other economic indicators in New Zealand also continue to underwhelm, with retail sales falling 0.4% from November to December.

And not including auto sales, retail sales fell by as much as 2%.

Retail sales is an important economic indicator the shaky isles with around 59% of GDP coming from domestic consumption.

Looking at the current account result, the June and September 2009 quarters, after tax profits of foreign owned New Zealand banks were reduced by unusually large company tax transactions.

”In the December 2009 quarter, some of this tax was reversed, contributing to a rise in profits earned by foreign owned banks.”

"Company profits are returning to levels seen before the effects of the tax charges and the financial crisis," government and international accounts manager John Morris said.

For the year, the current account deficit was NZ$5.5 billion, or 2.9% of GDP – worse than the widely expected 1.9% of GDP.

Meanwhile, The New Zealand Herald reported this morning that the NZ oil industry could reap NZ$30 billion annually by 2025, more than the country’s dairy industry.

The country earned just NZ$2.8 billion from oil in 2008.

Despite raising its price target by 45c, Credit Suisse has downgraded its recommendation on AGL Energy (NEUTRAL, price target $16.90). The broker said the recommendation change reflected recent share price strength.

Since releasing its 1H10 result, AGK shares have rallied nearly 10%.

The Swiss broker said the higher price target reflected upside from retail margins and asset sales.

Specifically, Credit Suisse said around 24c of the price target increase was based on its view of continuing margin improvement in the retail business. The broker said AGK is over hurdles from the implementation of its customer business and is not set to extract value from the retail side.

In addition, Credit Suisse sees value for AGK from the sale of non-core assets such as the Moranbah coal seem gas stake and the Loy Yang power station. The broker values the Moranbah stake at $541 million net of tax, sunk costs and a 50% risk weighting.

Citi upgraded Valad Property Group to BUY with a $0.14 price target.

Credit Suisse downgraded The Reject Shop to NEUTRAL, but raised its price target to $18.40.

UBS has downgraded Premier Investments (NEUTRAL, price target $9.00) despite a positive view on the company’s medium term prospects. The broker neutralised its view based on recent share price strength on short term operating headwinds.

In a note on the company’s first half results, UBS says apparel trading conditions were likely to remain difficult in the second half of the year, particularly given the company is cycling a comparable period that benefited from government stimulus.

This is a view shared by Citi (HOLD, price target $8.80). Citi goes on to say that historically PMV’s PE ratio has a strong correlation with movements in like-for-like sales, which suggests a weak share performance as the company faces operating headwinds over the second half of the year.

However, UBS says that over the medium term, the company remains strategically positioned with a strong balance sheet that it could deploy by licensing an international brand and rolling out new stores. Alternatively the group could acquire a small to mid sized retailer.

Also focusing on the PMV’s balance sheet, Goldman Sachs JBWere (BUY, price target $10.40) says an acquisition of capital management initiative is necessary to drive a share price re-rating. The broker expects this to occur over the next 6 to 12 months.

UBS has downgraded Premier Investments (NEUTRAL, price target $9.00) despite a positive view on the company’s medium term prospects. The broker neutralised its view based on recent share price strength on short term operating headwinds.

In a note on the company’s first half results, UBS says apparel trading conditions were likely to remain difficult in the second half of the year, particularly given the company is cycling a comparable period that benefited from government stimulus.

This is a view shared by Citi (HOLD, price target $8.80). Citi goes on to say that historically PMV’s PE ratio has a strong correlation with movements in like-for-like sales, which suggests a weak share performance as the company faces operating headwinds over the second half of the year.

However, UBS says that over the medium term, the company remains strategically positioned with a strong balance sheet that it could deploy by licensing an international brand and rolling out new stores. Alternatively the group could acquire a small to mid sized retailer.

Also focusing on the PMV’s balance sheet, Goldman Sachs JBWere (BUY, price target $10.40) says an acquisition of capital management initiative is necessary to drive a share price re-rating. The broker expects this to occur over the next 6 to 12 months.

Citi has upgraded AGL Energy to BUY with a price target of $16.60.