Australia | Oct 15 2008
By Chris Shaw
Signs the Australian economy’s current weakness may extend into the middle of next year come from today’s release of the Westpac-Melbourne Institute Leading Index, which indicates economic activity levels in three to nine months’ time will be well below trend levels.
The index reading for August was 2.5%, which Westpac chief economist Bill Evans points out compares unfavourably to its long-term trend rate of 4.0% and the 4.7% reading recorded only last May. The Coincident Index was similarly weak and recorded annualised growth of 2.0%, also well below its long-term trend rate of 3.7%.
A number of factors contributed to the outcome, the bank’s breakdown showing productivity and corporate profits contributed 0.6% respectively to the slowing since May, while US industrial production was responsible for 0.4%, share prices 0.3% and dwelling approvals 0.2%. Share prices and US industrial production are expected to have a further negative impact on the September and October readings given recent developments.
The latest readings return the index to its lowest level since the 2000/01 slowdown when it recorded 11 consecutive months of results of less than 2.5%. Evans points out the readings suggest the economy will slow further in coming months.
While the outcome is likely to be a slowdown no more severe than those experienced in 2000/01 and 1995/96, Evans notes the main concern is the current interaction between weak demand and limited supply of credit. This is where the Government’s stimulus package comes into play, as it should assist both the banks in accessing credit while stimulating demand though aggressive fiscal measures.
As well, further cuts in official interest rates by the Reserve Bank of Australia (RBA) are expected and these should see a further 150 basis points taken off the official cash rate in the next 3-6 months. In terms of timing the cuts, Evans sees the RBA taking a further 0.5% off rates at its November meeting, with a further 0.5% cut in December.
The reason the cuts will be so aggressive this time, in his view, is the RBA will be forced to push the cash rate lower if it hopes to lower mortgage rates significantly given the funding issues facing the banks at present.
According to Evans, the Government’s package will be successful in boosting growth and he has lifted his forecasts accordingly and for the current year he now expects GDP growth of 2.8%, up from 2.5% previously, while next year growth is forecast to come in at 2.2% against his previous estimate of 2.0%. While this remains weak growth, Evans notes it leaves the economy comfortably clear of entering a recession.