Australian economic growth looks set to remain sluggish

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The Westpac-MI leading index, a gauge on likely economic activity looking three to nine months ahead, weakened substantially in December, suggesting that the economy is likely to remain sluggish in the first half of 2016.

The index is a summary measure and includes information from a number of domestic markets, international activity, and consumer expectations about activity and unemployment.

According to Westpac, the six-month annualised deviation from trend growth decreased from –0.40% in November to –1.03% in December.

The negative figure indicates that the economy is likely to grow below trend in the months ahead, not contract as would be the case during a recession.

The table below, supplied by Westpac, reveals the internal movements within the index over December.

The movements suggest that offshore factors, rather than domestic influences, are weighing on growth expectations for the moment.

According to Bill Evans, chief economist at Westpac, the deterioration suggests that forecasts for an acceleration in Australian economic growth this year “may be somewhat optimistic”.

“This is another disappointing result,” wrote Evans following the release of the December report.

“The Index has now been growing below trend for the last eight months. It continues to signal that growth in the Australian economy in the first half of 2016 will be below trend. Apart from in August 2015, this negative deviation represents the largest deviation we have seen since the second half of 2011.”

Evans suggests that “the signal from the leading index is more down beat on growth in the first half of next year than the RBA and Westpac”, adding “the warning from the index of
below trend growth in the first half of 2016 is even stronger than last month”.

Despite the prospect of a further deceleration in economic growth in the quarters ahead, Evans maintains his view that the RBA will leave interest rates unchanged throughout the course of 2016.

“The Reserve Bank board meets next week on February 2. While volatile developments in world markets will figure in discussions we expect that the solid improvements in the labour market, partly assisted by further falls in the Australian dollar, will keep the Bank on hold. Indeed we expect that rates will remain on hold for the remainder of 2016.”

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