Australia | Jun 20 2007
By Chris Shaw
Further proof the Australian economy continues to grow strongly has come via the Westpac-Melbourne Institute Leading Index of Economic Activity, which recorded an increase of 6.7% for the three months to April. The latest reading is well above its long-term trend rate of 4.4%, which was also the rate of increase for March.
All four elements of the Leading Index posted gains in the period, with share prices up 3.2%, real money supply up 1.4%, dwelling approvals up 8.1% and US industrial production up 0.7%.
At the same time the associated Coincident Index was also strong at an annualized growth rate of 5.5%, again well above its long-term average growth rate of 3.7%. Driving the increase here was the ongoing improvement in the nation’s employment situation.
Westpac senior economist Bill Evans said the results were due to strong March quarter national accounts, which has resulted in significant upward revisions to his forecasts for both productivity and corporate profits.
In his view this confirms the signals of the past few months that the domestic economy has entered a period of strong and sustained economic growth, the last two quarters suggestive of an annual growth rate for GDP of more than 5%.
While not expecting the economy to continue at this pace, Evans is forecasting growth in 2007 of 4.2%, rising in 2008 to 4.5%. This growth will be supported by strong consumer spending, a recovery in housing investment, ongoing strength in business investment and a strengthening in export growth.
Adding to the good news, Evans points out inflation pressures are building only gradually, reinforcing his view interest rates will remain on hold for the remainder of this year. Next year is a different story though, as Evans remains of the view a new tightening cycle will start early in 2008, with rates likely to be bumped at least 0.5% higher in the first half.