Leading Index points to growth amid slowing conditions

Westpac-Melbourne Institute Leading Index pointed to above trend growth in April, yet bank warns of further moderation

Leading Index points to growth amid slowing conditions
Leading Index points to growth amid slowing conditions

June 16, 2010

Developments in commodity prices and corporate profits have seen the annualised growth rate of the Westpac–Melbourne Institute Leading Index stabilise at 7.6 percent in April, well above its long term trend of 3 percent.

The annualised growth rate of the Coincident Index was 3.9 percent, also above its long term trend of 3.2 percent.

Although the growth rate remained strong in April, Westpac Senior Economist Matthew Hassan says the month did see moderation from 8.8 percent in March.

"This is the first slowing after ten consecutive months of sharp acceleration – the year to March saw the sharpest upturn in the Leading index since the rebound coming out of the early 80s recession."

While the Index continues to point to robust growth three to nine months into the future, the moderation in April is notable given this largely pre-dates the sharp sell-off in global financial markets through May-June.

European sovereign debt concerns sparked a sharp slide that saw an 8 percent drop in the All Ordinaries Index in May with a further 6 percent drop in the first two weeks of June. Most commodity prices also fell sharply.


In terms of Index components, the most recent rise in the annualised growth rate from 5.4 percent in November to 7.6 percent in April has been mainly driven by three key factors.

These include: international development with commodity prices contributing 2.7 percentage points; US industrial production, 1.1ppts; and corporate profits 0.8ppts.

However, other components were a drag on Index growth, including: dwelling approvals (–0.9ppts); overtime worked (–0.7ppts); productivity (–0.5ppts); and the All Ordinaries index (–0.5ppts).

The real money supply added slightly to growth (0.1ppts).


According to Hassan, the sharp turnaround in commodity prices and fall in equities alone could see more slowing in the growth rate of the Leading Index in May-June.

He says the overall level of the Index was unchanged in the April month.

Despite the rise in US industrial production and real money supply, the All Ordinaries Index slipped 1.4 percent and dwelling approvals fell 14.8 percent, unwinding a sharp spike in March.

Retail trade was up by 0.3 percent; employment by 0.3 percent while the unemployment rate was unchanged.

With the Reserve Bank Board next meeting on July 6, Hassan says it is likely to leave rates on hold again.

"The minutes of the June 1 meeting showed the decision to pause then was mainly based on concerns about the deteriorating situation in Europe and uncertainty over potential spill-over effects via financial markets," he says.

"The Board viewed its earlier rate rises as giving it enough flexibility to wait for more information on both external developments and the inflation front."

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