Australia | Apr 15 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, was minus 5.1% in February, marking another monthly read well below long term trend of (a positive) 2.9%.
The annualised growth rate of the Coincident Index was 0.7%, though this read was positive it was also well below the long term trend of 3.4%.
Westpac economists call the rate of deterioration of the growth rate of the Leading Index “truly remarkable”. For some months the Index has been signalling that the Australian economy will enter a recession, they note, pointing out the consistent run of negative reads for the growth rate is comparable with Australia’s previous recessions which began in 1961, 1974, 1982, and 1990.
However, say the economists, a comparison with the last recession is “disturbing”. During that recession the annualised growth rate of the Index remained negative for 20 consecutive months, reaching its low point of minus 3.4% after 12 months. In this cycle the growth rate first went negative in October last year and deteriorated to minus 5.1% in this February reading. Conclusion: it’s all going much faster but also much more into negative territory than the previous time.
During that earlier recession the low point for the Australian economy was 1991 when the economy contracted by 1.3%. Westpac is currently forecasting that the Australian economy will contract by 1% in 2009 which the economists expect to be the low point of the cycle. The reason why Westpac economists label the February read as “disturbing” is because the current rapid deterioration in the growth rate of the Leading Index points to downside risk for their present forecast.
The economists have decided to defy their own indicator and stick to the view that the current recession in Australia will be less damaging than the one in the early 1990’s. That view is supported by the much more pre-emptive monetary and fiscal policy approach taken in this recession relative to the last one.
However, the economists add global economic conditions are much more concerning this time than in the early 1990’s. The low point of world growth in that period was 1.5% in 1991 whereas they now expect the world economy to actually contract by 1% in 2009 – the first contraction since World War 2.
Say the economists: “These qualifications nevertheless emphasise that both monetary and fiscal policy still have much more work to do. It would be a mistake for the monetary and fiscal authorities to assume that enough work has been done given this extremely dangerous global economic environment.”
Over the last five months the annualised growth rate of the Leading Index has fallen from 0.5% in September to minus 5.1% in February. Of the eight components of the Leading Index the major contributors to the 5.6ppt fall in the growth rate were: overtime worked (-1.4ppts); US industrial production (-1.1ppts); commodity prices (-0.9ppts); productivity (-0.8 ppts); share prices (-0.7ppts); corporate profits (-0.7ppts); and dwelling approvals (-0.1ppts).
The level of the Leading Index fell by 0.8 points (-0.3%) in February. Two of the four monthly components rose in February. Real money supply was up 1.2% and dwelling approvals rose 7.8%.
The level of the Coincident Index fell by 1.1 points (0.5%). The fall of 2.2% in real retail trade and rise in the unemployment rate from 4.8% to 5.2% were the most important factors behind the weakness in the Index. The sharp 1.1ppt fall in the growth rate of the Index over the month was largely explained by retail sales (-0.6ppts) and the unemployment rate (-0.4ppts).