Australia | Sep 16 2009
By Chris Shaw
The outlook for the Australian economy continues to improve according to the Westpac-Melbourne Institute Leading Index as the minus 1.8% reading recorded for July was an improvement of 2.8 points or 1.1% from the previous month. Also, the index has now recorded significant gains from the minus 7% reading from May.
All four monthly components of the Index rose in July, with share prices up 7.3%, dwelling approvals increasing by 7.7%, real money supply growing by 0.3% and US industrial production improving by 0.5%. The Coincident Index was largely unchanged, falling by 0.1 points.
Given the Index is an indicator of the likely pace of economic activity three to nine months into the future, today’s outcome supports the bank’s view growth is likely to slow in coming months as the annualised outcome of minus 1.8% for July is well below the long-term trend rate of 2.5%, while the minus 0.2% annualised growth rate for the Coincident Index is also below its long-term trend rate of 2.9%.
But according to the bank’s chief economist Bill Evans the data today support his expectations of a significant improvement in the economy’s growth prospects in 2010, as while growth in the second half of this year should slow to around 1% from the 2% recorded in the first half, which would translate into an annual growth rate of around 1.4%, this should increase to growth of 3.8% through 2010.
The data give the Reserve Bank of Australia (RBA) more information to work with in Evans’s view as the RBA board actively discusses the timing of the first interest rate hike of the new cycle. Evans notes the board has already pointed out uncertainties remain and this means a hike is unlikely to result from the meeting next month.
In Evans’s view each subsequent meeting will carry the risk of a rate increase, but with future growth signals unlikely to be strong enough he doesn’t expect any rate hike prior to February of next year, particularly given his forecasts call for weak growth momentum over the balance of 2009 and a corresponding increase in the unemployment rate in coming months.