Australia | Jun 17 2009
By Chris Shaw
The Westpac-Melbourne Institute Index Of Leading Indicators remains in negative territory, but the good news is the indicator was less negative in April than was the case in March, adding weight to the view economic conditions in Australia are slowly turning around.
The April reading was minus 3.5% and while this is significantly below the long-term trend of an increase of 2.8%, it is far better than the minus 5.1% recorded in March, which itself was better than the minus 6.1% recorded in February. In the view of Westpac chief economist Bill Evans the February reading is likely to prove to be the low point in the cycle.
Evans notes the index indicates the likely pace of economic activity three to nine months ahead, meaning the April reading suggests further modest contraction in the June and September quarters before a return to modest growth in the economy in the first half of 2010.
This fits in with Evans’s own forecasts, which call for the economy to contract by around 0.6% in the June quarter and by about 1.5% in the December half of this year before returning to positive growth of about 1.0% in 2010.
In terms of specific details within the latest index numbers Evans notes share prices, overtime worked, swelling approvals, corporate profits and US industrial production all contributed to the better reading in April, with the major offset being a fall in material prices.
According to Evans, recent data including today’s leading index numbers suggest while the Australian economy may contract further in the short-term, it should be entering a period of modest growth next year. While the Reserve Bank of Australia (RBA) still has a bias towards easing rates further, any future moves will thus likely be data dependent.
Given Evans expects higher fixed interest rates and rising unemployment in Australia as well as disappointing data elsewhere over the course of the year, the Westpac chief economist sees a solid enough case for the RBA to further cut rates in coming months.