Australia | Jul 18 2007
By Rudi Filapek-Vandyck
The annualised growth rate of the Westpac-Melbourne Institute Leading Index of Economic Activity, which indicates the likely pace of economic activity three to nine months into the future, was 6.1% in May. This remains above the Leading Index’s long-term trend of 4.4%.
The annualised growth rate of the Coincident Index was 5.0%, which is also above its long-term trend, of 3.7%.
Growth in the Index has slowed from its peak of 7.4% in February to 6.1% in May, but the economists point it the index remains well above the long term trend growth rate of 4.4%. This would suggest further strong growth lies ahead for the Australian economy over the next three to nine months.
The economists also note it appears there may be some correction forthcoming to Australia’s buoyant growth pace. Westpac is expecting that pace of economic expansion in Australia will slow to around 4.5% in the second half of 2007.
Consistent with the growth profile of the Leading Index, that growth would still be well above long term trend, albeit a little slower than the “unsustainable” pace of the last two quarters, according to the economists.
To offset some market fears regarding the outlook for 2008, the economists point out the Index is pointing to continuing strong growth into the first half of 2008. This coincides with their personal view. Westpac anticipates that 4% – 4.50% will be sustained in the first half of 2008.
Key factors, the economists believe, will be a strong but slightly more sedate growth pace for consumer spending; a resurgence in housing near the end of 2007; continuing strong growth in business investment (particularly infrastructure) and a welcome recovery in export growth supported by both resources and the farm sector.
After surging by 1.6 points (0.6%) in April, the Leading Index was up by only 0.5 points (0.2%) in May. Two of the four monthly components of the Index increased in May –
share prices (up 2.4%) and the real money supply (up 0.5%). This was partly offset by a 5.6% fall in dwelling approvals while US industrial production was stable.
The level of the Coincident Index rose by 0.7 points (0.3%). A strong labour market continues to support the Index. Total employment grew by 0.4%, while the unemployment rate fell to 4.2%.
Westpac economists do not expect the Reserve Bank Board to change official interest rates at its next meeting on August 7. However, the economists continue to expect that we have seen the low point in inflation and it will resume a sustained upward trajectory, requiring higher interest rates in 2008.