Australia | Mar 19 2008
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, has for the first time since November 2005 fallen below its long term trend in January. The event has triggered a change in interest rate outlook for Westpac economists who now believe the Reserve Bank of Australia has hiked official interest rates for the last time in this cycle earlier this month. However, investors and homeowners better not expect any rate cuts any time soon either with Westpac stating “it appears that rates will remain high for some time with rates likely to remain around current levels for at least the remainder of this year”.
The Westpac-Melbourne Institute Leading Index of Economic Activity came out at 4.1% in January, just below its long term trend of 4.2%. The annualised growth rate of the Coincident Index was 3.8%, the same as its long term trend.
Westpac economists report growth in the Leading Index has now weakened quickly from 6.3% in November 2007 to the 4.1% for January. This profile is consistent with their view that economic growth in Australia will slow through 2008 and 2009 with domestic demand anticipated to slow from the strong 5.7% in 2007 to 3.8% in 2008 and 1.9% in 2009. The economists believe this slowdown will be driven by the Reserve Bank’s “clear commitment to rein in inflationary pressures and the impact on the economy of the dislocation in credit markets”.
The level of the Leading Index fell by 0.1 points. Increases in dwelling approvals (up 1.9%), the real money supply (up 1.1%) and US industrial production (up 0.1%) were fully offset by a 10.9% fall in the stock market index which marked the biggest monthly fall since October 1987. In other words, the 2.2 percentage point decline in the growth rate of the Index between November and January (from 6.3% to 4.1%) was predominantly due to the collapse in the stock market (1 percentage point) and overtime worked (0.5 percentage points).
The level of the Coincidental Index rose by 0.8 points (0.3%). Employment rose 0.2% and the unemployment rate fell by 0.1 percentage points. Real retail trade declined by 0.2%.