Australia's economy went backwards last quarter, but this indicator says things are about to improve

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While the Australian economy just recorded its largest contraction since the global financial crisis last quarter, that’s unlikely to be repeated in the months ahead if the latest Westpac-MI leading index is anything to go by.

However, it’s not exactly signaling there’s boom times ahead either.

The survey’s six month annualised growth rate, an indication on the likely pace of economic activity relative to Australia’s trend growth rate looking three to nine months into the future, fell to 0.11% in November, down from 0.51% in October.

Although a decrease, the positive figure indicates that economic growth is likely to be above trend — now seen at around 2.75% per annum — in the first half of next year.

So, based on what the index is suggesting, growth will be OK without being spectacular.

“The run of four consecutive above trend readings is signalling a better outlook for the first half of 2017,” said Bill Evans, chief economist at Westpac. “Nevertheless, it is disappointing that the growth rate appears to, once again, be losing momentum.”

In the 15 months to August this year, the index had previously printed in negative territory, a lead indicator, funnily enough, for the ugly September quarter GDP report that was released at the beginning for this month.

Evans notes that the improvement in the indices growth rate in the past six months was almost entirely driven by an improvement in the survey’s international components.

“Rising commodity prices (0.49 percentage points), the steepening of the yield curve (0.41 percentage points) and the lift in the share market (0.07 percentage points) have played the dominant roles,” he said.

Offsetting those improvements, he says that its domestic components have actually been weakening.

“Dwelling approvals (minus 0.57 percentage points), the Westpac-MI consumer sentiment expectations index (minus 0.13 percentage points) and Westpac-MI unemployment expectation index (minus 0.10 percentage points) have all subtracted from growth,” he said.

With the index now pointing to the likelihood of slightly above trend growth in the first half of next year, Evans says he remains comfortable with his forecast for 3% GDP growth in 2017.

However, that confidence doesn’t extend to the latest treasury forecasts offered in its mid-year economic and fiscal outlook (MYEFO) earlier this week.

“We struggle somewhat with the government’s MYEFO forecast for 2016/17 which implies average quarterly growth of around 0.8% per quarter in the December (2016), March (2017) and June (2017) quarters,” says Evans.

“That growth pace would be around 0.5% above trend – a stretch particularly as we see the growth rate of the leading index slowing once again.”

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