The outlook for Australian economic growth continues to deteriorate

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The outlook for Australian economic growth over months ahead continues to weaken, at least according to the latest Westpac-MI leading index for August.

The index, a gauge on the likely pace of economic activity three to nine months into the future, decreased to -1.14% from -0.4% in July, a level not seen since mid-2013.

A negative reading suggests that economic growth is likely to be blow trend, not negative.

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According to report, the key drivers of this slowdown were weakness in the ASX 200 (–0.74ppts), dwelling approvals (–0.20ppts), aggregate monthly hours worked (–0.20ppts), the Westpac-MI Consumer Expectations Index (–0.17ppts), commodity prices in AUD terms (–0.17ppts), US industrial production (–0.08ppts) and the Westpac-MI Unemployment Expectations Index (–0.07ppts).

“The recent sell off in the sharemarket has been particularly important in explaining the sharp fall in the growth rate between July and August. Of the 0.74ppt fall in the growth rate between July and August, 0.46ppts came from the sharply lower S&P/ASX 200,” said Westpac.

The only component to contribute to an increase in the six month annualised growth rate was a steepening in Australia’s yield curve that contributed 0.53ppts to the final index figure.

“The economy seems to be losing momentum as we move through 2015,” said Bill Evans, chief economist at Westpac.

“In the first four months of 2015 the average growth rate of the Leading Index was 0.16% above trend. That seemed to be a welcome lift in momentum from the second half of 2014 when the average growth rate was 0.67% below trend. However in the last four months the growth rate has slowed from 0.03% below trend to 1.14% below trend.”

Evans notes that the reading points to a likely “below trend” start to next year, and that Westpac’s call for Australian economic growth to be around trend in 2016 “looks a little vulnerable”.

Despite the downside risks to the growth outlook, Evans believes that “there is little chance that the Board will decide to change policy settings” at its October meeting.

He also suggests that the RBA are unlikely to move interest rates until at least 2017.