Australia | Apr 21 2010
By Rudi Filapek-Vandyck
Investors looking for a reason as to why the Reserve Bank of Australia is by far not finished in its tightening policy only need to look at today's release of the Westpac-Melbourne Institute leading index for the Australian economy. The latest update for February is showing the fastest growth in the history of this index since 1997.
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 7.2% in February, well above the long term trend of 2.8%. The annualised growth rate of the Coincident Index was 3.6%, also above the long term trend of 3.2%.
February represents the fastest annualised growth rate in the Leading Index since 1997, point out the economists. They add the index's growth rate has continued to build with the growth rate accelerating during the past six months from 2% (well below trend) to 7.2%. This, say the economists, is a signal that growth in the Australian economy will accelerate through 2010 to well above trend by year's end.
If accurate, this would imply that Westpac's current forecast for growth through the year is too low as well as that the Reserve Bank Board forecast in the minutes from the April Board meeting will have to be lifted as well. Conclude the economists: the Index is indicating the risk profile for growth is now tilted firmly in the upward direction.
Supporting the growth recovery story is the recent performance of the Coincident Index. Growth in the Coincident Index has picked up from 0.7% six months ago to 3.6% and is now above trend growth for the second month in a row, comment the economists. Prior to this, growth in the Coincident Index had not been above trend since September 2007.
The level of the Leading Index increased from 256.5 to 257.8 – an increase of 1.3 points or 0.5%.
The economists explain global factors are driving the "extraordinary increase" in the growth pace of the Leading Index. Of the 5.2 ppts increase in the growth rate over the last 6 months 4.4 ppts have been due to global factors – commodity prices (2.7 ppt's) and US industrial production (1.7 ppt's). Other contributors to the growth rate increase were overtime worked (0.5 ppt's); productivity (0.6 ppt's) and corporate profits (1.1 ppt's).
The economists also point out that some early evidence of the "two speed" economy risks for Australia can be seen with those components of the Index which actually detracted from the growth improvement – all ordinaries index (–0.6 ppt's); real money supply (–0.7 ppt's) and dwelling approvals (–0.2 ppt's).
The level of the Coincident Index increased from 247.8 to 247.9 – an increase of only 0.1 points.
Explain the economists: the 2.9 ppt increase in the growth rate of the Coincident Index from 0.7% to 3.6% over the last 6 months was mainly due to the improvement in the labour market (1.7 ppt's); household incomes (0.8 ppt's) and production (0.7 ppt's).
The sluggishness in the retail sector subtracted 0.3 ppt's from the growth improvement.
Westpac economists now expect the RBA is likely to tighten again in May, or June at the very latest, restoring rates to "normal" before "pausing to assess the interaction of the boost to incomes from the commodity boom and the offsetting effect of rate hikes and an unusually cautious consumer on the growth outlook".