Australia: Leading index remains below trend - Westpac

Bill Evans, Chief Economist at Westpac, notes that the six month annualised growth rate in the Westpac Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, rose from –0.54% in June to –0.10% in July.

Key Quotes

“Despite the improvement in the growth rate it remains negative for a second consecutive month pointing to below trend growth momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.”

“While the Index only gives us a glimpse of the likely momentum in the first few months of 2018 it currently seems to be more consistent with our own view of the likely growth environment in 2018 than the forecast recently released by the Reserve Bank which is pointing to above trend growth in 2018 at 3.25%. Westpac is currently forecasting growth of 2.5% in 2018. Trend growth is generally assessed as 2.75%.”

“The Leading Index growth rate has slowed from 1.11% above trend in February to 0.10% below trend in July, a deterioration of 1.21ppts. Two components account for almost all of the reversal: commodity prices (–1.63ppts) and yield spread (–0.43ppts). After surging 42% over the second half of 2016, Australia’s commodity prices (Reserve Bank Commodity Price Index) have fallen 16% in the first seven months of 2017 (in AUD terms).”