Leading Index points to above trend growth


Annualised growth rate of the Westpac–Melbourne Institute Leading Index hits 6.8 percent in July

Leading Index points to above trend growth
Leading Index points to above trend growth

September 22, 2010

The annualised growth rate of the WestpacMelbourne Institute Leading Index was 6.8 percent in July, well above its long term trend of 3.2 percent.

Meanwhile, the annualised growth rate of the Coincident Index was 4.3 percent, also above its long term trend of 3.3 percent.

Westpac Chief Economist Bill Evans says this is the fourth 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," Evans says.

"The growth rate of the Index is still consistent with a faster pace of growth in the economy than Westpac expects," he says.

Westpac’s current forecast is that year average growth in 2010 will be 3.5 percent, with an even pace through the year, despite some sizeable swings in different sectors.

In 2011 the Bank has raised its year average growth forecast to 4 percent from 3.5 percent.

This is in line with the Reserve Bank's current forecast for growth in 2011 which it released in its Statement on Monetary Policy in August.

"However we expect growth to slow in 2012 whereas the RBA is expecting growth to remain above trend at 4 percent," Evans adds.

INDEX PERFORMANCE

Since the growth rate in the Leading Index peaked four months ago it has fallen from 10.2 percent to 6.8 percent.

Corporate profits (0.3ppts); commodity prices (0.3ppts) and real money supply (0.3ppts) were more supportive of growth than four months ago.

Meanwhile US industrial production (0.0ppts) was neutral.

Key domestic variables proved a bigger drag on growth.

These include: the all ordinaries index (–0.9ppts); dwelling approvals (–1.3ppts); overtime worked (–1.5ppts) and productivity (–0.8ppts).

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