The prospects for a stronger Australian economy next year may have to be reviewed

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The prospects for Australian economic growth brightened fractionally in June with the Westpac-MI leading index rising to 0.06% from -0.02% in May.

The gauge, a measure of the six month annualised deviation from Australia’s trend growth rate, indicates the likely pace of economic activity three to nine months in the future.

Over the past six months four of the surveys eight subcomponents contributed to growth. The details of what added and subtracted from the index are shown below.

Despite the increase, Westpac chief economist Bill Evans suggests that the economic momentum seen earlier in the year appears to be losing momentum.

Here’s Evans.

“As we noted last month the change in the growth rate of the Index is indicating that the economy appears to be losing momentum through the middle of 2015. In the first four months of 2015 the average growth rate was 0.21% above trend. That was a welcome lift in momentum from the second half of 2014 when the average growth rate was -0.66% below trend. However, in the last two months the growth rate has eased back again averaging only
0.02% above trend.

With the deviation from trend now back to near zero the promising signs that we saw in the early months of 2015 that growth in the economy might be lifting into ‘above trend’ territory through the second half of 2015 appear to be waning. That profile is certainly in line with Westpac’s forecasts that annualised growth pace in the economy will be stuck around 2.5% in both halves of 2015, largely unchanged from the disappointing result in 2014 of around 2.5%”.

As a result of the recent weakening in the index, Evans suggests the view that 2016 will better year for the economy than that seen in 2014 and 2015 may now start to be questioned – something that will have implications not only for monetary but fiscal policy as well.

“That growth rate of 3.25% is considered to be in the ‘above trend’ territory and it is likely that the authorities might start to review that optimistic forecast in spite of the expected boost to demand from the falling Australian dollar and record low interest rates”.

While Evans believes that August is a “live meeting” when it comes to the RBA potentially reducing interest rates further, he believes that it is “very unlikely” to occur. Indeed, despite the market being split on whether or not the RBA will reduced interest rates at its November meeting, a meeting where the RBA have traditionally been very active, Evans believes that RBA will leave the cash rate at its current level throughout this year and next.

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