Growth forecasts just improved for the first time since 2018 — but the Australian economy still has a long way to go yet

There’s a long way to go yet for the Australian economy (Photo by David McNew, Getty Images)
  • A lead indicator of Australia’s near-term economic growth has just ticked into positive territory for the first time since November 2018, signalling conditions are improving.
  • That was largely off the back of gains on the Australian Securities Exchange (ASX), improved dwelling approvals and strong commodity prices.
  • As market volatility picks up globally however, the good sign could be short-lived. Economists still believe the RBA will need to continue cutting rates to stimulate the economy, with the next cut expected in October.

In some rare positive news, the Australian economy looks like it’s picking up a little speed.

That’s according to the Westpac-Melbourne Institute Leading Index, which indicates how the economy should track over the next three to nine months.

On Wednesday, it ticked into positive territory for the first time since November 2018 — moving to 0.05% from -0.09 where it sat in June.

“Further confirmation of this around trend reading would be consistent with the economy growing around trend for the last three or four months of 2019 and well into the first half of 2020,” Westpac chief economist Bill Evans said in a statement accompanying the data release.

Westpac’s Leading Index in July 2019 (Supplied)

The positive result was largely bolstered by some good economic performers. Gains on the stock market were the biggest driver of the result, followed by better-than-expect dwelling approval numbers. Strong commodity prices also helped lift the Index.

Those factors, present for much of the year, have helped substantially improve the index since it recorded a dismal -0.71% in February. Those drivers are also now looking like they might falter.

“Since the beginning of August, global share markets have sold off sharply, the ASX is down 4% over the month to date after posting a 17% rally over the year to July,” Evans said.

READ MORE: The Australian stockmarket has had one of its worst days in 3 years as the US-China trade war escalates

That, combined with broader weakness in the Australian economy, could see this ray of light quickly fade.

This week Westpac also reported that the number of mortgage arrears — borrowers who have fallen behind on their repayments — had risen. The proportion of borrowers who were more than 90 days behind grew to 0.9%.

While still a relatively small proportion, any rise is a worry given the size of the major banks’ loan books and the fact that the value of those properties has likely decreased amid a multi-year property slump. That has potentially placed some recent borrowers in negative equity territory — where they owe the bank more money than their property is even worth.

That’s the least of the economy’s worries, however.

The Reserve Bank of Australia (RBA) reckons there’s a global economic downturn on the horizon and is downgrading its own growth forecasts in the meantime.

The RBA is also, by governor Phillip Lowe’s own admission, unable to get unemployment down to 4.5% where it needs to be to grow wages, increase spending and kickstart the economy again. That situation looks like it’ll force the RBA into continuing to cut the official interest rate.

READ MORE: The RBA is now considering the drastic measure of negative interest rates — meaning you could be paid to borrow money from the bank

“Lowe has acknowledged that this patch is weak for the next six to twelve months but he remains optimistic that GDP is going to bounce back to 3% and inflation is going to hit 2%, which is what he does. He keeps revising down in the near term and keeping the medium-term outlook upbeat,” economist Stephen Koukoulas told Business Insider Australia.

“You look at those forecasts and you think why don’t you already start cutting the interest rate towards zero? What are you waiting for?”

October it would seem, with both Evans and the market expecting another 0.25% rate cut then.

Unless there’s more good news on the way, Wednesday’s better-than-expected leading index will do little on its own to change that.

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