Australia | Jul 15 2009
By Chris Shaw
Since hitting its lowpoint in February of minus 6.1% there was been steady improvement in the Westpac-Melbourne Institite Leading Index, the bank’s chief economist Bill Evans noting the fact the May reading of minus 3.9% is higher than April’s minus 4.1% adds weight to the view the worst of the downturn has now passed.
There is also evidence the current downturn could be shorter than previous recessions as Evans points out while the annualised growth rate of the index, which indicates the likely pace of economic activity three to nine months forward, has been negative for the past eight months and continues to contract on a six-month annualised basis, its low point occured after just five months.
This compares to the last two downturns where the annual growth rate of the index contracted for 20 and 16 months respectively in 1989/91 and 1981/83, with the low points not reached for 12 and 11 months during those downturns. There remains some way to go before growth returns to trend levels though, Evans pointing out the long-term trend rate for the index is 2.6% and for the Co-incident Index is 3.0%, the latter recording annualised growth in May of minus 0.1%.
Other economic data support a stronger and faster recovery in Evans’s view as consumer sentiment has risen strongly over the past two months and is back to levels of December 2007, while business confidence is improving and the housing recovery appears to be progressing solidly.
Policy is responsible for these improvements according to Evans as low interest rates and fiscal stimulus measures have provided a boost. The economy has also been a beneficiary of stronger economic conditions in China, as evidenced by Australian exports rising by 1.7% in the six months to the end of March compared to a 20% fall globally in the same period.
At the same time as exports have held up, Australian imports have fallen by around 14%, so offering an external boost to the economy overall and providing an additional reason for confidence to households. In Evans’s view this could be enough to allow the economy to withstand an expected contraction in business investment, so keeping growth modestly positive.
The expectation now is for consumer spending to be stronger than previously forecast, while business investment and employment intentions should also receive a boost from the greater levels of confidence in the economic outlook. Add in expectations of a stronger housing market by year’s end and better export levels as the global economy improves and Evans sees an economy performing better by that time than what is currently indicated by the Leading Index.
This means Evans no longer sees the Reserve Bank of Australia as cutting rates in coming months despite retaining an easing bias, preferring instead to remain on hold as our economy deals with still weak conditions globally and what have been aggressive stimulus measures.