Australia | Oct 17 2007
By Rudi Filapek-Vandyck
Westpac and the Melbourne Institute report their Leading Index of Economic Activity, which indicates the likely pace of economic activity three to nine months into the future, has recorded an annualised growth rate of 5.6% in August, above the Index’s long term trend of 4.3%. The annualised growth rate of the Coincident Index was 4.5% which is
also above its long term trend of 3.7%.
The August numbers have somewhat surprised the economists. Last month the economists were of the view that growth in the Index may be on a sustained downward path after a long robust period. This month’s reading, however, appears to be pointing to clear recovery in the growth profile.
The economists add the recent low point in growth was still well above long term trend, and it is their view that the subsequent reacceleration points to a sustained period of strong growth in the Australian economy.
Westpac notes the revised forecasts by the Federal government in economic growth (from 3.75% to 4.25%) and in growth in total final demand (from 4% to 5%) for the year to June 2008 are broadly in line with its own forecasts of 4.50% and 5.25% respectively.
Those forecasts imply a strong pick up in growth from 2006/07 – consistent with the sustained message that has been emanating from the Leading Index.
Key drivers of the improved growth outlook are consumer spending supported by strong employment growth and business investment, the economists say. They believe the Federal Government is too conservative in its employment growth forecasts. The forecast for 2007/08 has been lifted from 1.50% to 2.25% but Westpac forecasts growth of 2.9%.
The level of the Leading Index increased by 1.5 points in August (0.6%). Three of the four monthly components increased – share prices (up 1.7%); the real money supply (up 2%) and US industrial production (up 0.2%). Only dwelling approvals fell (down 1.7%).
Strong contributors to the annual growth rate of the Leading Index are the real money supply; US industrial production and corporate profits. The level of the Coincident Index increased by 0.8 points (0.3%). Both employment (up 0.3%) and retail sales (up 0.5%) increased in the month.