Sluggish Australian economic growth may be here to stay

Quinn Rooney/Getty ImagesTough slog ahead. Maybe.
  • Australian economic growth slowed sharply in the second half of last year.
  • Leading economic indicators suggest the slowdown will extend well into 2019.
  • Westpac, along with many other economists and financial markets, expects growth will remain sluggish, leaving little choice for the RBA but to cut official interest rates.

Australian economic growth slowed sharply in the second half of last year.

If the latest leading economic indicators are anything to go by, the slowdown could extend for some time yet.

According to the latest Westpac-MI Leading Index, an indicator that uses a variety of local and international economic indicators to predict Australian economic growth looking three to nine months into the future, fell further in February to -0.56%.

Westpac

The figure indicates that Australian economic growth looks set to be 0.56% below Australia’s trend growth rate in the months ahead, widely regarded to be around 2.75% per annum or slightly less.

Trend growth is the level where the economy is expanding at a sufficient pace to keep unemployment and inflationary pressures stable.

In a nutshell, if the Leading Indicator is right, sluggish growth seen in the economy late last year looks set to extend this year.

“The Index has now registered three consecutive months in which the growth rate has been negative,” said Bill Evans, Chief Economist at Westpac. “This is a strengthening signal that growth through the first two to three quarters of 2019 is likely to be below trend.”

Evans is putting faith in the signals being generated from the index, suggesting economic growth will slow further in the year ahead, leaving the Reserve Bank of Australia (RBA) little choice to cut Australia’s cash rate in order to stimulate activity levels.

“Westpac expects growth in the Australian economy in 2019 to be around 2.2%,” he said.

“We expect the RBA’s growth forecasts to be lowered in both May and August. Westpac expects rate cuts of 25 basis points in both August and November.”

In its latest forecasts offered in February, the RBA saw Australia’s economy growing by 3% this year before slowing to 2.75% in 2020.

This table from Westpac shows the contribution of each individual component in the Leading Index.

Westpac

Over the past six months, the vast majority of components have either weakened or remained relatively stable, the only exception to the rule being prices for Australia’s key commodity exports which have boomed.

Without the latter, the Leading Index would point to an even more pronounced slowdown in the economy compared to that already predicted.

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