Leading Index points to growth

Economic activity forecast to pick up in the coming months following a significant slowdown through 2010

Leading Index points to growth
Leading Index points to growth

February 16, 2011

Economic activity is forecast to pick up in the coming months following a significant slowdown through 2010, according to the latest WestpacMelbourne Institute Leading Index.

The annualised growth rate of the Index, which indicates the likely pace of economic activity three to nine months into the future, was 4.2 percent in December 2010, comfortably above its long term trend of 3.3 percent.

The annualised growth rate of the Coincident Index was steady at 3.5 percent, directly in line with its long term trend.

Westpac Senior Economist, Matthew Hassan, says this is the first uptick in the growth rate of the Leading Index since March last year.

"Back then, the Index growth rate peaked at an extraordinary 9.7 percent – the strongest read since the mid-80s and a clear indication of vigorous economic expansion," Hassan says.

He says the slowdown through most of last year was equally dramatic with the risk that December could have seen the Index growth rate drop below trend for the first time since October 2009.

"The uptick is welcome news and confirms that after a strong burst in early 2010, the economy was settling back into a more moderate and sustainable growth pace heading into 2011."

While the Leading Index shows how the economy was travelling in December, Hassan cautions it has yet to include the impact of sever weather conditions in January and February.

"The floods and Cyclone Yasi will clearly distort Australia’s growth profile in 2011 with a weak first half likely to be followed by a strong rebound as normal operations resume and repair and rebuilding work get underway," he says.

"We expect the net effect to see growth a little bit lower for 2011 as a whole."

The second half of 2010 saw the annualised growth rate of the Leading Index slow from 7 percent in July to 4.2 percent in December.

The 2.8ppt slowdown was mainly due to weaker contributions from: manufacturing materials prices (-1.3ppts); corporate profits (-0.8ppts); and overtime worked (-0.7ppts). There were also a drag from productivity (-0.5ppts) and US industrial production (-0.5ppts).

These were partly offset by the share market which added 0.3ppts, the real money supply (0.5ppts) and dwelling approvals (0.2ppts).

The level of the Leading Index increased 0.8 percent in December, from 278.5 to 280.7.

All of the four monthly components registered rises, with the all ordinaries index surging 3.5 percent, the real money supply rising 0.7 percent, dwelling approvals jumping 8.7 percent and US industrial production rising 0.8 percent.

"Some of these components will be significantly weaker in early 2011 – we already know the sharemarket had a flat January (all ordinaries rose 0.2 percent) and flood disruptions are likely to have had a major impact on dwelling approvals in affected areas," Hassan says.

Meanwhile, the growth rate in the Coincident Index was 3.5 percent in December, unchanged from November and holding at its long term trend rate.

The level of the Coincident Index rose 0.3 percent in the December month from 268.3 in November to 269.1.

Monthly components were mixed with real retail trade down 0.1 percent; employment unchanged but the unemployment rate down a tick to 5 percent.

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