Australia | Aug 18 2010
By Rudi Filapek-Vandyck
It would appear the leading indicator for the Australian economy as developed and published by Westpac and the Melbourne Institute continues to point towards slowing momentum for the Australian economy in the months ahead, even though overall growth should still remain relatively high.
Westpac economists report 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 6.0% in June, wjich remains well above the long term trend of 3.0%. The annualised growth rate of the Coincident Index was 3.8%, also above its long term trend of 3.2%.
This is the third consecutive month when the growth rate of the Index has slowed. In absolute terms the growth rate of the Index is still high but it has clearly peaked, acknowledge the economists. They note the growth rate of the Index is still consistent with a faster pace of growth in the economy than their current expectations.
Westpac economists' current forecast is that growth through 2010 will be 3.5% with an even pace through the year despite some sizeable swings in different sectors. This is slightly above trend which they assess as 3.75%.
In 2011 and 2012 Westpac expects growth of a steady 3.4% – only slightly above trend. The economists note the Reserve Bank, in its recent released Statement on Monetary Policy, is more optimistic with expected growth rates of 3.75% – 4% in both years. Those forecasts are based on an assumption that rates move broadly in line with market expectations – implying little or no rate change.
Westpac expects another round of rate hikes through 2011 which is expected to lower the likely growth profile.
Since the growth rate in the Index peaked 3 months ago it has fallen from 9.1% to 6%. Corporate profits (0.4ppt's); commodity prices (0.5ppt's); real money supply (0.1ppt's) and US industrial production (0.1ppt's) were more supportive of growth. However, key domestic variables were all a bigger drag on growth. These included: the all ordinaries index (–1.1ppt's); dwelling approvals (–1.3ppt's); overtime worked (–1.2ppt's) and productivity (–0.7ppt's).
The level of the Leading Index fell by 0.1 points, the first outright decline since May 2009. Two of the four monthly components of the leading index rose in June and two fell. The real money supply and US industrial production rose 0.2% and 0.1% respectively. The all ordinaries index and dwelling approvals fell by 2.9% and 3.3% respectively.
The growth rate in the Coincident Index is now clearly above trend. This is the second consecutive month that the growth rate is above trend pointing to a very solid growth performance for the economy in the June quarter, note the economists. Westpac is currently forecasting GDP and domestic final demand to both register an annualised growth rate of 4.8% in the June quarter.
The Reserve Bank Board next meets on September 7. Westpac economists report they remain confident the RBA will decide to keep rates on hold. The economists expect the RBA to resume its tightening cycle in the first quarter of 2011.
