The longer-term outlook for Australia's economy remains a concern for Westpac's Bill Evans

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Australia’s economy looks set to perform well for the remainder of the year, according to the latest Leading Index released by Westpac-MI earlier today.

However, it’s the longer-term outlook that remains a concern to Westpac’s chief economist Bill Evans.

The survey’s six-month annualised growth rate — something that indicates the likely pace of economic growth relative to trend looking three to nine months into the future — fell to 0.92% in April, down marginally on the 1.12% level of March.

Westpac-MI Leading Index. Source: Westpac

While a small decline, the index continues to point to growth levels nearly one percentage point higher than historic norms over the remainder of the year.

“Westpac concurs with the RBA’s current forecast of 3% growth through 2017. That growth rate is above trend and consistent with the positive leads from the Index over the last nine months,” Evans said.

The Leading Index uses a variety of leading market and economic indicators — both domestic and abroad — to estimate how the economy is likely to perform in the future.

Evans said that the recent improvement in the index — pointing to above-trend levels of growth in the past nine surveys — had been driven largely by offshore factors such as higher commodity prices and a steepening in global bond yields.

They weakened slightly in April, contributing to the small decline in the headline index.

“In April both those components slowed with the change in the 6 month contribution being -0.19 percentage points for commodity prices and -0.05 percentage points for the yield curve which has recently been flattening,” Evans said.

Of the other components in the survey, Westpac said that US industrial production added a positive note to the index as did domestic factors such as a higher ASX 200, dwelling approvals and unemployment expectations.

This table from Westpac shows each component’s contribution to the Leading Index in April.

Source: Westpac

However, while things are looking good for the economy near-term, it’s where it’s heading beyond that which remains of most concern to Evans.

“We do have concerns for growth beyond 2017. Prospects for growth in 2018 look discouraging,” he said.

“Housing construction is likely to be contracting through 2018 while export growth will slow and the terms of trade are likely to be falling, slowing nominal income growth.

“Prospects for an offsetting boost from household spending and business investment are not encouraging given the ongoing negative feedback loop from weak labour incomes to consumption and sales,” he adds.

Given that clouded outlook, Westpac is currently forecasting that the RBA will keep official interest rates on hold this year and next.

“Consistent with the Leading Index we do concur with the Bank’s forecast for 3% growth in 2017 but expect a slowdown next year,” Evans said.

“Such a development would eliminate any pressure to raise rates next year.”

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