The leading indicators point to a further slowdown in the Australian economy ahead

Jeff J Mitchell/Getty Images
  • Australian economic growth looks set to slow further in the coming quarters, according to the Westpac-MI Leading Index.
  • It fell to -0.27% last month, consistent with GDP growth slowing to around 2.5% in the middle of the year.
  • Westpac expects the RBA will downgrade its growth forecasts in early February. It sees the cash rate remaining at 1.5% until at least the end of 2020.

The slowdown in the Australian economy late last year is likely to be repeated in the quarters ahead, according to the latest Westpac-MI Leading Index for December.

The six-month annualised growth rate in the Westpac Index, designed to tract the likely pace of economic activity relative to trend GDP growth looking three to
nine months into the future, fell to –0.27% during the month, a steep drop from the +0.42% level reported in November.

Trend GDP growth in Australia is widely regarded as being around 2.75% per annum. It’s the level where unemployment and inflation is expected to remain stable. The Westpac Leading Index measures the expected deviation from trend GDP growth in the future, and is based upon a variety of leading economic indicators from both home and abroad shown in the table below.

Westpac

In December, the index points to GDP growth easing below trend in the coming quarters, a scenario that could place downward pressure on inflation and upward pressure on unemployment in the middle of the year.

Westpac’s Chief Economist Bill Evans wasn’t surprised by the latest report, suggesting it fits with his view that Australian economic growth will ease further in the year ahead.

“[The result] is consistent with our view that growth has slowed from a solid above trend pace to at or below trend going forward,” he said.

“Over the eight months from September 2017 to April 2018, the growth rate averaged +0.78%… consistent with the strong, above trend momentum in the official growth figures that showed the Australian economy growing at around an annualised pace of 4% in the first half of 2018.

“In the eight months since April the growth rate has averaged only +0.16% — a clear step down.”

Westpac

Given the signals from the latest leading indicators, Evans expects economic growth in upcoming GDP reports will be subdued, including when the Q4 update is released in early March.

“Westpac expects that the growth momentum for the full second half of last year will come in at 2%, lower than indicated by the Leading Index but certainly consistent with the step down in average growth over the last eight months,” he said.

“The growth pace in 2019 is expected to fall from the annual rate in 2018 of 3.0% to 2.6% — both rates are well short of the Reserve Bank’s current outlook of 3.5% in 2018 and 3.25% in 2019 set out in its November Statement on Monetary Policy.”

As such, Evans expects the RBA will downgrade its GDP growth forecasts when next released in early February.

He also believes the bank will convey a more downbeat assessment on the outlook for the economy given weakness in an increasing number of indicators.

“A likely more downbeat assessment of the consumer and the housing construction cycle are significant factors behind our assessment that the Bank will lower its growth forecasts for 2018 and 2019,” he said.

However, while financial markets and an increasing number of economists now believe the next move in the RBA cash rate will be lower, Evans retains the view that it will remain unchanged until at least the end of 2020.

The RBA last adjusted its cash rate in August 2016 — a decrease of 25 basis points to 1.5%. The bank has not increased the cash rate since late 2010.

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