BILL EVANS: Australia's economy will strengthen smartly in 2017, but next year's 'less encouraging'

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The Australian economy looks set to strengthen smartly in the first half of 2017, according to the latest Westpac-MI Leading Index for December, released earlier today.

The report’s six-month annualised growth rate — which indicates the likely pace of economic activity relative to trend, looking three to nine months into the future — rose from 0.00% in November to 1.28% in December.

That suggests that Australia’s economy is not only likely to grow above trend in the first half of the year, but by some margin too.

Here’s hoping.

Source: Westpac

“This marks the fifth consecutive month where the growth rate in the index is at or above trend,” said Bill Evans, chief economist at Westpac.

“The run of five consecutive above or at trend readings is signalling a better outlook for the first half of 2017.

“In particular, whereas over the September-November period the index had been losing momentum, albeit still in positive territory, the December result represents a very strong rebound.”

According to Evans, the strengthening in the index seen over the past five months has been almost entirely driven by offshore factors.

“Rising commodity prices, the steepening of the yield curve and US industrial production have played the dominant roles,” he says.

“On the other hand, the domestically based confidence and housing market components have been the drag. Dwelling approvals, the Westpac-MI consumer sentiment expectations index and Westpac-MI unemployment expectations index have all subtracted from growth.”

So the improvement has not been driven by local factors, but those from abroad.

While Evans remains comfortable with his growth forecast of 3% in 2017, he says that his concerns surrounding the outlook for growth are “further out”.

“Prospects for growth in 2018 look less encouraging,” he says.

“Housing construction is likely to be contracting through 2018 while export growth will slow and the terms of trade are likely to be falling, slowing nominal income growth. Prospects for an offsetting boost from household spending and business investment are not encouraging.”

Despite that cloudy outlook, with growth likely to rebound in the year ahead based off the re-accleration seen in the leading index, Evans says that Australian interest rates are still likely to remain on hold over the course of 2017.

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