Australia | Mar 17 2010
By Rudi Filapek-Vandyck
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 6.3% in January. This, note Westpac economists, is well above the leading index's long term trend of 2.7%.
The annualised growth rate of the Coincident Index rose to 3.9%, also above its long term trend of 3.2%.
The economists note that after rising sharply over the second half of 2009, the Leading Index continues to point to strong momentum carrying into 2010. Although the annualised growth rate in the Index held steady in January – ending the rapid month to month acceleration seen since May last year – it remains well above its long run average, on a par with previous cyclical highs.
Moreover, point out the economists, there are now clear signs that the pick-up foreshadowed by the Leading Index is showing through in actual activity with the annualised growth rate in the Coincident Index rising back above trend for the first time since September 2007.
In terms of the components of the Index, the remarkable growth turnaround from a negative 0.4% in August 2009 to a positive 6.3% in January has been driven by: industrial commodity prices (+2.5 ppt's); US industrial production (+2.4 ppt's); real corporate profits (+1.4 ppt's); productivity (+1.1 ppt's); domestic labour market conditions (+0.4 ppt's) and dwelling approvals (+0.2%).
These positives were partially offset by contractions in the real money supply (–1.1 ppts), partly reflecting tighter credit conditions, and the share price index (–0.1 ppt's).
The level of the Leading Index rose by 0.5 points (0.2%) in January. Two of the four monthly components of the Index fell, one held steady and one rose. The share price Index fell 6.2% in January, although the All Ordinaries has since regained most of that loss, note the economists.
Also, dwelling approvals also fell by 7% in January after several strong monthly gains. The real money supply component was flat and US industrial production rose 0.9%.
The Coincident Index, a companion measure that provides a gauge of the current pace of activity, is also now showing clear signs of acceleration. The annualised growth rate in the Index has risen from 0.3% in August to 3.9% in January, the fastest pace since July 2007, when GDP growth was running at 5% (annualised).
Westpac economists believe the Reserve Bank of Australa is of the view that official interest rates are only around 50bp's below neutral. So, with recent wage outcomes suggesting inflation is more likely to remain well contained near term and some residual uncertainty about surprisingly weak housing finance data, Westpac economists expect the RBA to again opt for a pause in April.
They continue to expect a resumption in the gradual tightening in May with a further 25bp rate hike and a final hike taking the cash rate to 4.50% in Q3.
Westpac foresees a “sharp pull-back” in consumer confidence later this year and this will serve as the signal for an extended pause in the RBA's tightening process, the economists predict.