Australia | Jul 16 2008
By Chris Shaw
The equity market is often considered a leading indicator of economic activity so the recent weakness of late in Australian stocks could be read as a precursor to a weakening in the health of the Australian economy. Other data support such an outcome as the Westpac-Melbourne Institute Leading Index, which suggests the likely level of economic activity in the economy 3-9 months in the future, recorded a lower rate of growth in May.
The index in annualised terms reported an increase of 2.1% for the month, which as Westpac chief economist Bill Evans notes is well below its long-term growth trend of 3.9%. The rate of growth for the Coincident Index also fell, its increase of 3.0% comparing to its long-term average growth rate of 3.8%.
As Evans points out the outcome suggests the Australian economy is set to slow further in coming months, as the fall for the six months to May is the largest in percentage terms since early in 2001, which coincided with the introduction of the GST and followed on from a number of increases to official interest rates.
The next most significant decline was in 1995/96 and Evans regards this as a better comparison for the current outlook given it too was a period where the Reserve Bank of Australia (RBA) had lifted rates sharply.
Just as a decade or so ago domestic spending growth fell sharply Evans expects a similar outcome this time around, as from a 5.1% increase last year domestic expenditure is forecast to grow by just 2.4% this year and an even worse 2.1% in 2009. It is worth pointing out such an outcome is broadly consistent with current RBA estimates.
On the plus side this slowdown should also produce an easing in inflationary presures, as while next week’s CPI outcome expected to show inflation has increased to 4.5% it should be back to around 2.75% by the end of 2010. This supports the bank’s argument against the likelihood of any further hikes to official interest rates in coming months.