Australia | Dec 19 2007
By Rudi Filapek-Vandyck
Westpac and the Melbourne Institute report the annualised growth rate of their Leading Index of Economic Activity, designed to indicate the likely pace of economic activity three to nine months into the future, was 5.5% in October, once again above its long term trend of 4.2%. The annualized growth rate of the Coincident Index was 3.9% around its long term trend of 3.8%.
The economists report the signal from the Index that there will likely be solid growth in Australia over the next three to nine months has been consistently clear throughout 2007.
Westpac expects growth in the economy in 2008 of 4%, driven by solid household spending as household income growth remains strong. Wages, employment growth and tax cuts will all support household incomes.
Despite a temporary slowdown in investment growth in the September quarter the economists expect “decent growth” in investment spending, particularly supported by infrastructure spending in 2008. The benefits from the surge in investment in export related industries should also support solid export growth in 2008 of around 9%.
The economists add this outlook is based on global growth holding at or above trend which comes eerily close to the Reserve Bank’s recent revision for global growth to be closer to its long term trend in 2008.
In addition, the economists say, the above outlook also assumes the current turmoil in credit markets gradually eases through 2008 as lenders become more comfortable with their counterparties’ exposures and governments and central banks adopt further sensible policies to ease the current problems.
The level of the Leading Index increased by 1.2 points (or 0.5%) in October. Two of the four monthly components in the Index declined – dwelling approvals (down 2.8%) and US industrial production (down 0.5%). The money supply rose by 3.1% and the share market increased by 2.8%.
The level of the Coincident Index rose by 0.2 points. Employment rose by 0.1% while the unemployment rate edged up by 0.1%. Retail trade was broadly flat.
As Westpac economists expect credit conditions to be improving by February as well as further evidence of Australia’s worrying inflation problems. The RBA is expected to raise official interest rates on February 5.