Australia's stellar economic run looks like it'll last for some time yet

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Australia’s stellar economic run looks like it’ll last for some time yet, according to the latest Westpac-MI leading index.

The survey’s six-month annualised growth rate index — a gauge on the likely pace of economic activity looking three to nine months into the future — rose from 0.15% in August to 0.58% in September, signalling that economic growth is likely to be above trend in the first half of next year.

The index uses eight individual components — both domestically and offshore focused — to garner the likely strength in the Australian economic activity in the future, hence the name “the leading index”.

A positive figure signals that GDP growth is likely to be above trend — currently deemed to be around 2.75% per annum — in the period ahead.

Based on the survey, the March and June quarter GDP figures released earlier this year look like they’ll be a sign of things to come. It also suggests that Australia’s run without a recession — now at 100 quarters — will continue to lengthen.

Source: Westpac

“The September reading is the second consecutive above trend result and follows 15 months of persistent below trend reads,” said Bill Evans, chief economist at Westpac.

“It is the strongest growth rate recorded since December 2013 and a clear positive signal for the near term economic outlook.”

Evans suggests that the signal generated by the index “is broadly consistent with Westpac’s forecast for growth to hold around a 3% pace over the course of both this year and next”.

Bullish.

Evans notes that most of the improvement seen in the index seen over the past six months — taking it from a low of -1.18% in April to its present level — has largely been due to “offshore developments”.

“Nearly two-thirds of the gain has come from the combination of a rally in commodity prices (+0.51ppts), a modest recovery in US industrial production (+0.40ppts), a globally-driven improvement in financial conditions reflected in the sharemarket (+0.20ppts) and the yield spread (+10ppts) components,” he says.

Evans notes that stabilising labour market conditions and modest support from consumer sentiment and dwelling approvals, all domestic factors, have also contributed the lift in the headline index.

With economic growth expected to run above trend in the coming quarters, and given the view that new RBA governor Philip Lowe gives considerable weighting to financial stability concerns when deliberating monetary policy settings, Evans suggests that further rate cuts are unlikely.

“While we give little probability to a further rate cut at the next meeting our assessment of the growth outlook, including the shape of the construction cycle, points to rates remaining on hold for the foreseeable future,” he says.

The Australian Bureau of Statistics will release its September quarter GDP report on Wednesday, December 7.

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