Australia | Nov 18 2009
By Chris Shaw
Australia’s economic outlook continues to brighten as the Westpac-Melbourne Institute Leading Index for September rose to well above its long-term trend rate of 3.1%, posting an annualised growth rate of 5.8%. The Index indicates the likely pace of economic activity three to nine months into the future.
According to Westpac chief economist Bill Evans, the September reading reflects an amazing turnaround in the Index, as it has moved from a minus 5.4% annualised growth reading since May of this year. This is the fastest turnaround in the growth rate of the Index since the economy came out of the mid-1970s recession.
The Index result supports Evans’s view the Australian economy is setting up for stronger growth in 2010, his forecasts calling for economic growth to rise from an expected 1.75% this year to around 4% in 2010. This would put growth above the current Reserve Bank of Australia (RBA) forecast of 3.5% growth next year.
What has driven the recent turnaround in the Index, according to Evans, is stronger US industrial production (IP), improved material prices, better productivity, higher share prices and real corporate profits, a lift in dwelling approvals and better domestic labour market conditions. At the same time there has been a contraction in real money supply, which he notes reflects the current state of credit market conditions.
For September the Index gained 0.9%, driven by higher dwelling approvals, stronger share prices and slightly stronger US IP, with the negative for the month being a slight fall in real money supply. In Evans’s view today’s data add weight to his expectation the RBA will again increase interest rates by 0.25% when it meets at the start of December, which would be a move in response to the recent flow of strong economic data.
Evans’s view is despite indications from the RBA in its minutes from the November meeting that it may be prepared to pause in December, he sees this as unlikely given the RBA doesn’t meet in January and the recent data has been sufficiently strong to justify a further hike.