Growth slowing down: Leading Index


Despite above-trend results, the growth rate of the Westpac-MI Leading Index has slowed for the third consecutive month

August 18, 2010

The annualised growth rate of the WestpacMelbourne Institute Leading Index was 6 percent in June, well above its long term trend of 3 percent.

The annualised growth rate of the Coincident Index was 3.8 percent, also above its long term trend of 3.2 percent.

Despite the above-trend statistics, Westpac Chief Economist Bill Evans says 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. The growth rate of the Index is still consistent with a faster pace of growth in the economy than Westpac expects," Evans says.

"Our current forecast is that growth through 2010 will be 3.5 percent with an even pace through the year despite some sizeable swings in different sectors. This is slightly above trend which we assess as 3.25 percent," he says.

In 2011 and 2012 Westpac expects growth of a steady 3.4 percent, while the Reserve Bank is more optimistic with expected growth rates of 3.75 percent to 4 percent 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. We expect another round of rate hikes through 2011 which will lower the likely growth profile," Evans adds.

RESULTS BREAKDOWN

Since the growth rate in the Index peaked three months ago it has fallen from 9.1 percent to 6 percent.

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).

As reported by Westpac, 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 percent and 0.1 percent respectively.

The all ordinaries index and dwelling approvals fell by 2.9 percent and 3.3 percent respectively.



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