If the latest Westpac-MI leading Index for March is anything to go by, it looks like the Australian economy will enjoy a strong period of growth in the second half of 2017.
However, while things are looking good near-term, there’s still plenty of concern over how the economy will perform longer-term.
The survey’s six-month annualised growth rate — which indicates the likely pace of economic growth relative to trend looking three to nine months into the future — rose to 1.17% in March, up fractionally on the 1.14% level of February.
The Leading Index uses a variety of leading market and economic indicators — both domestic and abroad — to estimate how the economy is likely to perform in the future.
The positive figure indicates that economic growth is likely to sit well above historic norms in the back-end of 2017.
That also fits with the separate “Stateometer” released by ANZ Bank earlier today, which pointed to an improvement in economic activity in most Australian states and territories in the three months to February.
According to Westpac’s chief economist Bill Evans, the improvement in the Leading Index has largely been driven by international factors in recent months.
“The Leading Index growth rate has lifted over the last six months from 0.31% in October to the current 1.17%,” he says.
“Over that period the key drivers of that improvement have been global factors (such as) rising commodity prices, the steepening of the yield curve, the ASX200, and US industrial production.”
That largely reflects international, rather than domestic factors and even those have come under pressure in recent weeks as investors question the merits of global reflation trade which powered stocks, bond yields and commodity prices higher in response to the election of Donald Trump.
Given the negligible contribution from the survey’s domestic components to the improvement in the leading Index over the past six months, it suggests that risks to Australia’s growth outlook appear slanted to the downside beyond the near-term.
There are signs that is already occurring, with the index falling back from
Evans agrees, suggesting that he has “concerns for growth beyond 2017”.
“Prospects for growth in 2018 look discouraging,” 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 given the ongoing negative feedback loop from weak labour incomes to consumption and final sales.”
Hardly a stellar assessment, but one that Evans says the RBA is reluctant to address given continued strength in Sydney and Melbourne’s housing markets.
“The Reserve Bank Board next meets on May 2. The Board is certain to keep rates on hold,” he says.
“The Board is concerned about excessive household leverage which has been boosted by rising house prices. While this concern might be alleviated by a rate hike the real economy is in no shape to deal with higher rates.”
Indeed, if anything, it appears that the economy outside of Sydney and Melbourne’s housing markets could do with further monetary stimulus given weak inflationary pressures and iffy labour market conditions at present.
Whether the RBA will be afforded the policy flexibility to deliver additional rate cuts, if required, will largely be determined by what happens next in Australia’s east coast housing market.