Leading Index shows peak in growth rate


Domestic factors continue to prove a drag on the growth rate of the Westpac-Melbourne Institute Leading Index

Leading Index shows peak in growth rate
Leading Index shows peak in growth rate
July 21, 2010

The annualised growth rate of the WestpacMelbourne Institute Leading Index was 6.7 percent in May, well above its long term trend of 3 percent.

The annualised growth rate of the Coincident Index was 3.7 percent, also above its long term trend of 3.1 percent.

Westpac Chief Economist Bill Evans says this is the second consecutive month when the growth rate in the Index has slowed.

"In absolute terms the growth rate remains remarkably high but it appears that growth in the Index has peaked," Evans says.

"Despite the slowing, the current growth rate of the Index is still indicative of a stronger outlook for growth in the near term than Westpac expects. We are currently expecting a growth pace through the second half of 2010 of around 3.5 percent annualised, slightly above trend which we assess as 3.25 percent," he says.

According to Evans, the anomaly probably lies with the global outlook.

"If we dissect the change in the growth rate of the Leading Index over the last six months to its individual components we note that domestic factors are a drag on the growth rate whereas positive offshore factors broadly offset these domestic forces," he says.

INDEX COMPONENTS

Over the last six months the growth rate in the Index has fallen slightly from 6.9 percent to 6.7 percent.

International factors – commodity prices (2 ppt's) and US industrial production (1 ppt) added 3 ppt's to the growth rate.

This was more than offset a bigger drag from domestic factors – dwelling approvals (–1.3 ppt's); overtime worked (–1.3 ppt's); and equity prices (–1.1 ppt's).

Other lesser contributors to the movement were corporate profits (0.7 ppt's); money supply (0.5 ppt's) and productivity (–0.7 ppt's).


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