Australia's economy may be already slowing down

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The outlook for Australian economic growth continues to soften with the latest Westpac-MI leading index for February pointing to sub-trend levels for activity in the months ahead.

The indices six-month annualised deviation from trend growth rate, a measure of the likely pace of economic activity three-to-nine months into the future, came in at -0.82% for the month.

While an improvement on the -0.99% level of January, the negative figure indicates that economic growth is likely to undershoot its long-run trend, at least according to the forward-looking indicators used to comprise the index.

Importantly, the negative reading does not suggest that actual economic growth will be negative, thus pointing towards a recession.

“Despite some improvement over the last two months, the leading Index continues to point to below trend growth through much of 2016, implying a slowdown from 2015’s slightly above trend pace,” said Matthew Hassan, senior economist at Westpac.

“The December quarter national accounts released earlier this month showed GDP growth of 3% for 2015 as a whole, with growth running at a 3.5% annual pace over the second half of the year – ‘trend’ is considered to be around 2.75%. That solid finish was foreshadowed by the leading index which had run 0.10% above trend on average over the first half of the 2015.”

However, just as the index pointed to an above-trend growth in late 2015 – something that was duly confirmed by the ABS earlier this month – it is now pointing to a modest deceleration in activity in the quarters ahead.

“The six monthly annualised growth rate averaging 0.67% below trend since mid-2015,” says Hassan. “That is a clear signal that growth is set to return to the more sluggish 2-2½% GDP growth rates seen in 2014.”

The table below, supplied by Westpac, reveals the internal contributions each component of the index contributed to the February result. Five of the eight components made negative contributions, led by a 0.38 percentage point detraction from the RBA’s commodity price index. These were partially offset by improved domestic labour market indicators, along with a bounce in consumer sentiment.

Despite the prospect of sub-trend growth arriving in the months ahead, Westpac continues to see the RBA leaving domestic interest rates unchanged over the course of 2016.

“We continue to expect the Bank to leave rates on hold throughout 2016,” says Hassan.

“Although the Bank is clearly watching developments abroad closely for potential threats, the solid growth figures for 2015 and continued resilience of the labour market are major positives domestically. Recent strength in the Australian dollar has been associated with a more positive outlook for commodity prices and as such would not be grounds for a policy adjustment.”

Bolstering the findings of the Westpac-MI survey, the separate ANZ Stateometer report released earlier today – a gauge of economic performance that uses 16 individual indicators to provide a near real-time assessment of the Australian economy – slowed noticeably in January, indicating that economic growth likely decelerated in the early parts of 2016.

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