This indicator suggests a near-term recovery in Australian economic growth is unlikely

Photo by Joe Raedle/Newsmakers

The outlook for Australian economic growth continues to deteriorate, at least according to the Westpac-Mi leading index for January.

Its 6-month annualised deviation-from-trend growth rate, a gauge that indicates the likely pace of economic activity three to nine months into the future, fell by 0.24 percentage points to -1.24% in January, taking it back to lows not seen since the second half of 2011.

The index is a summary measure and includes information from a number of domestic markets, international activity, and consumer expectations about activity and unemployment. The negative figure indicates that the Australian economy is likely to grow below trend in the first half of 2016, not contract as would be the case during a recession.

The table below, supplied by Westpac, reveals the internal movements of the indices eight components that lead the the final headline figure.

According to Bill Evans, chief economist at Westpac, offshore factors, rather than domestic influences, were behind the further deterioration registered during the month.

“The theme of international factors which are represented by the share market; the yield curve; US industrial production and commodities weighing on the index while being partially offset by an improving labour market and solid confidence is clearly captured in the divergent movements of the components of the index,” says Evans.

Despite the expectation that economic growth will decelerate further in the months ahead, Evans forecasts that the RBA will leave interest rates unchanged in 2016, something that is at odds with financial markets who continue to price in the likelihood of a further 0.25% reduction to the cash rate.

“The picture of the economy which is encapsulated in the index neatly summarises the key issues for policy,” says Evans. “International factors are pointing to downward pressure on rates whereas domestic factors, partly due to the boost to the economy from the low Australian dollar and low interest rates, are sending positive signals.”

“That interaction over the course of 2016 will determine whether markets are correct.”

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