Australia | Feb 17 2010
By Rudi Filapek-Vandyck
If the leading index from Westpac and the Melbourne Institute is anything to go by then Australia is about to experience no less than a genuine growth spurt in the months ahead. This would confirm the positive indications generated recently by labour market data (unexpectedly stronger jobs generation) and National Australia Bank's business confidence survey. However, it has to be noted that other indicators, including NAB's business conditions survey for January have been unexpectedly weak.
Maybe the "secret" in all these indicators is that December data have been much stronger than January's? If so, then the latest update on the Australian economy three to nine months into the future certainly fits into such mould.
Westpac economists report this morning 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 6.2% in December. This is well above the index's long term trend of 2.7%. The annualised growth rate of the Coincident Index rose to 1.3%, stilld below the long term trend of 3.0%.
After hitting an extreme low of minus 6.9% in May, report Westpac economists, the annualised growth rate in the Leading Index has bounced back to +6.2% in December. This large swing is not only the fastest reversal since the economy bounced out of recession in the mid 1970's, point out the economists, it also puts the growth outlook back on a par with that seen in 2007 at the height of Australia’s resources boom.
The turnaround has been broadly based as well with all but one component of the Leading Index contributing to the improvement. The 8.9ppt rise in the growth rate in the Index from minus 2.7% in July to 6.2% in December came from: US industrial production (+3 ppt's); industrial commodity prices (+1.7 ppt's); real corporate profits (+1.7ppt’s); domestic labour market conditions (+1.4 ppt’s); productivity (+1.1 ppt's); the share price index (+0.8 ppt's); and dwelling approvals (+0.7ppt's). The only drag continues to come from the real money supply component (minus 1.3 ppt’s), a reflection of tighter credit conditions.
The level of the Leading Index rose by 1.3 points (0.5%) in December. Three of the four monthly components of the Index rose in December: the share price Index (up by 3.6%); dwelling approvals (up by 2.2%) and US industrial production (up by 0.6%). One monthly component – the real money supply – fell by 0.9%.
Also, note the economists, the turnaround in leading indicators apparent six months ago is now starting to show through more clearly in coincident indicators of growth. The Coincident Index rose 1 point (0.4%) in December lifting the six month annualised growth rate to 1.3%. Although this is still below the long run average rate of 3% Westpac economists point out it is nevertheless a notable improvement on the 0.4% average read over the previous six months.
Note that Westpac is currently forecasting growth in the December quarter of 0.6%, described by the economists as "a solid result but still below trend".
The economists highlight data releases since the RBA's February meeting, including another surprisingly strong jobs report last week and today’s Leading Index result, continue to show a faster than expected upturn in growth domestically. As such, Westpac expects the RBA's decision to leave rates unchanged in February to mark a short rather than extended pause. Westpac believes the RBA will hike again by 25bp at the March meeting.