Australia | Jul 20 2011
– Westpac-MI Leading Index slows further in May
– Index implies the 3-9 month growth outlook is weak
– Supports Westpac's view the next move on interest rates will be down
By Chris Shaw
The Westpac – Melbourne Institute Leading Index has continued to slow, recording growth of just 1.6% for May. The Index indicates the likely pace of economic activity three to nine months ahead.
The reading for May is is well below the long-term trend growth rate of 3.0% and represents the lowest growth rate for the Index since September of 2009. Growth has been at below trend rates since February of this year.
In the past six months the growth rate of the Leading Index has slowed from 4.5%, the decline driven by weaker US industrial production, lower dwelling approvals, weaker materials prices and corporate profits, a decline in productivity and a fall in real money supply.
The Coincident Index is also registering weak growth, this measure falling to a reading of 264.9 from 265.2 previously. The Coincident Index, which offers a pulse of current activity, has not delivered above trend growth since last September. This is due to weak retail sales, a recent slowing in employment and the flood related disruption to production experienced in the first quarter of this year.
Westpac chief economist Bill Evans expects growth momentum for the Australian economy over the second half of 2011 of around 2.5% in annualised terms. Such an outcome would be consistent with the below trend growth being signaled by the Leading Index.
Evans suggests a key element of the growth profile in coming months will be continued weak growth in consumer spending as households look to lift savings rates. Ongoing weakness in residential and non-residential building is also expected.
According to Evans, there is also likely to be some correction to investment plans for firms servicing the non-mining sectors of the economy, this in response to the current weak sales outlook. Strong ongoing mining investment should act as an offset.
The Reserve Bank of Australia (RBA) meets on August 2 and Evans suggests recent board minutes indicate a moderating of the earlier view that rates need to be lifted urgently. This implies no change at the upcoming meeting, the wildcard being the possibility of a very high inflation number for the June quarter.
While Westpac sees the next move on rates as down, Evans accepts the RBA at present is some way from sharing this view. The RBA has at least indicated growth forecasts would be revised lower, this reflecting ongoing consumer caution.
Evans suggests the Leading Index reading is consistent with the expectation a weak economic growth environment will eventually require a reduction in interest rates.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
