Australia | Mar 18 2009
By Rudi Filapek-Vandyck
The annualised growth rate of the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, has printed a negative figure for January, indicating things are looking worse for the Australian economy in the months ahead.
Westpac economists report the reading for January came out at minus 3.1%, a long way below the long term trend of a positive 3.2%. The annualised growth rate of the Coincident Index was 1.8%, down half a per cent on its December read of 2.3% and also well below its long term trend of 3.5%.
The economists note the Leading Index is now in deeply negative territory which is “consistent with contracting economic activity”. They note the 49 year history of the gauge has generated only four occasions in which the index’s growth rate has fallen below the current read: in the early 1960s, the mid-70s, the early 80s and the early 90s.
Each of these occasions was followed by recessions in the Australian economy.
The January update is the weakest read in the Leading Index since August 1990. At the time, the six month growth rate fell to minus 3.4%. The economists note back then the economy had already entered what went on to become a deep and long-lasting recession. The trend unemployment rate had risen 1.2ppts from its cyclical low and went on to climb a further 3.8ppts to a high of 10.7% over the following two years.
Notably, highlight the economists, the current deterioration in the Leading Index has happened over a much shorter timeframe but it is at minus 3.1% (only 0.3 above the 1990 low). For reasons of comparison: the August 1990 low came a full year after the Index’s growth rate first slipped below zero. The current cycle has already seen the growth rate collapse to a similar level in less than six months.
The annualised growth rate in the Leading Index has fallen 7.1ppts in five months, from the above trend 4% registered in August to minus 3.1% in January. The economists report the deterioration has come across six of the eight components. Amongst the domestic items, significant negative contributions have come from: falling corporate profits (-1.4ppt); slowing productivity growth (-1.4ppt); further falls in share prices (-1.1ppt); and a slide in dwelling approvals (-0.6ppt). The only positive contribution has been from higher overtime worked (+0.2ppt).
Conditions abroad continue to have a major impact with the US industrial production component detracting -2.4ppts.
The level of the Leading Index fell by 0.6 pts (-0.2%) in the January month. Three of the four monthly components declined: share prices, US industrial production and dwelling approvals. Three of the four quarterly components fell in the December quarter: overtime, corporate profits and productivity. Growth in the Coincident Index also fell in January but this was mainly due to a moderating boost from policy factors late last year. The level of the Coincident Index fell by 0.2 pts (-0.1%), with annualised growth slipping from 2.3% in December to 1.8% in January.
One of the main movers was real household income which contributed +2.0ppts in January compared to +2.3ppts in the previous month. The economists note this is still well up from the +1.0ppt contribution this component made in August.
While the Leading Index continues to point to sharply weaker activity, the Coincident Index suggests a more moderate deterioration to date. The economists believe the main reason for this divergence is the policy support to household incomes and retail trade. These two components combined have lifted the six month annualised growth rate in the Coincident Index by 2.1ppts since August. Without this positive, growth on this measure would also have slipped into negative territory for the first time since 1991.
Westpac economists believe the policy response to date suggests the Australian economy is not heading for a repeat of the early 1990s experience.
The Reserve Bank Board next meets on April 7. Westpac expects the RBA to lower the official cash rate by another 25bps to 3% with the overnight cash rate eventually moving to 2% in the second half of 2009.