Australia | Apr 16 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, was 3.3% in February, well below its long term trend of 4.1%. The annualised growth rate of the Coincident Index was 3.9%, just above its long term trend of 3.8%.
Westpac economists comment growth in the Index has slowed markedly in the last few months. After peaking at a solid 6.5% in November last year it has now slowed to 3.3%, this is being labelled as “appreciably below long run trend” for the first time since October 2005. Factors linked to overseas economic conditions have been notably responsible for that slow down.
Two components of the Index (share prices and US industrial production) have contributed 1.5 percentage points of the total fall of 3.2 percentage points in the growth rate between November and February. Other significant contributors to the fall were dwelling approvals (0.6 percentage points) and overtime worked
(0.8 percentage points).
The economists note the latest reading from the Leading Index is consistent with their own view that domestic demand in Australia will slow through 2008. Westpac expects domestic spending growth to slow from 5.7% in 2007 to 3.5% in 2008 and only 2% in 2009. Most notably consumer spending growth is expected to slow from 5% in 2007 to only 2.5% in 2008. A weak housing market; the recent collapse in the Westpac-MI Consumer Sentiment Index and the recent slowing in the lead indicators for employment growth strongly point to a subdued consumer in 2008. However, the economists anticipate steady interest
rates and tax cuts from July can be expected to provide some support for the consumer in the second half of 2008.
They believe most uncertainty surrounds business investment. Business confidence is falling and reduced access to funding is likely to slow investment in those sectors servicing the domestic economy. Investment associated with the resources boom and belated plans by the public sector to increase infrastructure investment will continue to support investment activity. The freeing up of capacity through a slowdown in domestic focussed investment will assist in the completion of infrastructure initiatives, they suggest.
The economists point out there was no change in the level of the Leading Index in February. Two of the four monthly components of the Index increased in February and two declined. The two “international” components fell -share price Index (-1.4%) and US industrial production (-0.5%). The two domestic variables -real money supply (0.6%) and dwelling approvals (0.1%) were higher. The level of the Coincident Index rose by 1 point (0.4%). Key strength once again came from the labour market. Employment increased by 0.3% and the unemployment rate fell by 0.1 percentage points.
The Reserve Bank Board next meets on May 6. Westpac economists now believe the RBA is likely to look through an expected high inflation reading prior to the meeting and focus on the medium term outlook instead. This would indicate the outlook for a slowdown in domestic spending as is clearly signalled by the Leading Index will give the RBA “sufficient comfort” that inflation will return to the 2-3% target range by 2010. Having said all of the above, Westpac does not expect the Australian economy will slow quickly enough for the RBA to feel comfortable to reduce rates any time in 2008.