Australia | Jan 28 2009
By Rudi Filapek-Vandyck
The annualised growth rate of the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, stood at minus 2.2% in November, well below its long term trend of 3.5%. The annualised growth rate of the Coincident Index was 1.3%, positive but also below its long term trend of 3.5%.
Westpac economists report following some modest revisions, the growth rate in the Leading Index in October was reduced from the previously reported 0.6% to minus 0.3%. Combined with the negative growth rate for November we are currently experiencing the first negative reads for economic growth in Australia since May 2001.
The economists point out that in the past this has been a useful signal of the likelihood of Australia experiencing a recession.
Westpac’s preferred definition of a recession is if the economy actually contracts over a full twelve month period. Using that definition Australia has experienced three recessions since 1965. The first came in the mid 1970s when growth contracted by 1.2% in the year to the December quarter of 1974 and continued into the March quarter 1975 when it contracted by 1.1% through the year.
The next recession occurred in the early 1980s when GDP contracted by 1.1% in the year to the September quarter of 1982 and year on year growth remained negative until the June quarter 1983.
Finally, in the early 1990s, GDP contracted by 1.4% in the year to the March quarter 1991 and negative year on year growth persisted for another three quarters.
As an early indicator of those recessions, the economists recall the growth rate in the Leading Index turned negative around a year before it was possible to conclude that a recession had actually occurred. As such, in the 1970’s recession the growth rate in the Index turned negative in December 1973; in the early 1980’s recession the growth rate turned negative in October 1981; and in the early 1990’s the growth rate of the Index turned negative in September 1989.
However, the economists point out, there have been two other episodes in December 1985 and October 2000 when the growth rate in the Index turned negative but the Australian economy avoided recession; what followed was a “substantial economic slowdown” only. In the year to September 1986 growth slowed to only 1.1% while it was only 1.0% in the year to June 2001.
Back to the present, the growth rate in the Index has now fallen strongly from the 4.4% registered in July to today’s read of minus 2.2%. Almost all of the eight components of the Index have contributed to the fall -share price index (-1 ppt); dwelling approvals (-1 ppt); US industrial production (-1.6 ppt); commodity prices (-0.5 ppt); overtime worked (-0.8 ppt); productivity (-0.6ppt); and corporate profits (-1 ppt).
If we broadly associate share and commodity prices along with US industrial production as off shore effects there is around a 50/50 split between offshore and domestic factors in explaining the growth contraction in the Index, say the economists.
The level of the Leading Index fell by 2.5 pts (1.0%). This significant fall in the Index was mainly explained by a 12.8% fall in dwelling approvals; a 6.8% fall in the share price Index; and a 1.3% fall in US industrial production.
Growth in the Coincident Index remains positive but at a tepid rate, say the economists. The level of the Coincident Index rose by 0.1 points with a firmer contribution from retail trade (+0.1 ppt); but a bigger drag from employment (-0.2 ppts) while the unemployment rate was unchanged in November.
The Reserve Bank Board next meets on February 3 and Westpac economists seem to have little doubt the meeting will conclude with another reduction to the RBA’s overnight cash rate.