Australia | Oct 21 2009
By Rudi Filapek-Vandyck
Westpac economists report 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 1.7% in August. This reading is just below the index’s long term trend of 2.8%. The annualised growth rate of the Coincident Index was minus 0.1%, also below the long term trend of 2.8%.
According to the economists, the pace of recovery in the growth rate of the Leading Index thus far has been “remarkable”. They note the annualised growth rate has moved from a negative 6.9% in May to today’s print of a positive 1.7% in August, representing an increase of 8.6 ppts.
Following the two recessions Australia experienced in the early 1980’s and 1990’s the rate of recovery in the Index was not as steep, the economists note.
They recall in the recovery in 1990/91 Australia’s GDP growth rate improved by 4.5 ppt’s over 9 months and in the 1982 recovery the growth rate improved by 6.6 ppts over 6 months. Growth increased from minus 0.9% in 1991 to 3.9% in 1992 while it accelerated from a negative 2.5% in 1982 to 3.6% in 1983.
The current sharp improvement in the growth rate of the Leading Index strongly supports the view that the Australian economy is moving onto a much stronger growth trajectory in 2010. It is certainly supportive of Westpac’s forecast that GDP growth in Australia will increase from 1.5% in 2009 to 4% in 2010.
The components of the Index that explain the sharp improvement in the growth of the Leading Index are: domestic labour market conditions (2.4 ppt’s); US industrial production (2 ppt’s); share prices (1.3 ppt’s); corporate profits (1.3 ppt’s); dwelling approvals (0.9 ppt’s); manufacturing prices (0.6 ppt’s); and productivity (0.6 ppt’s). These contributions were partly offset by the real money supply which subtracted 0.4 ppt’s from growth.
Westpac economists believe these components are capturing the key themes behind the improving prospects for the economy in 2010, which are global recovery; considerable improvement in prospects for the labour market; sharp improvement in financial markets; better outlook for corporate profits; resurgence in housing market; recovery in commodity prices; and improved productivity.
The Index is also signalling the key risk for 2010 as global credit markets remain difficult and interest rates continue to rise both the demand and supply of credit are likely to be headwinds, say the economists.
They note the level of the Index rose by 2.8 points (1.1 %). That follows a 1.4% increase in the Index in July and a 1.1% increase in June. This is the largest percentage increase in the Index over three months since the early 1980’s.
Of the four monthly components of the Index three increased -share prices (up 5.5%); real money supply (up 0.1%); and US industrial production (up 0.8%)- dwelling approvals fell by 0.1%.
The level of the Coincident Index rose by 0.1 points. Across the monthly components: real retail trade rose 0.6% and employment fell by 0.2%.
Westpac economists would not be surprised were the RBA to lift the official cash rate by 50 basis points at the upcoming board meeting in November.