The Westpac-MI leading index, a lead indicator for likely economic activity in Australia over the next three to nine months, fell heavily in March.
The decline to -0.14, well below the 0.50 level of February, suggests, according to Westpac’s Chief Economist Bill Evans, that below trend economic growth for the remainder of 2015 is a “certainty”.
Reflecting on the sharp slowdown, Evans had this to say:
“This is a disappointing but not surprising result. After being negative, and therefore projecting below trend growth in the three to nine month “window”, in the February to December period last year the growth rate lifted encouragingly in February to above trend. However that has proved to be short lived and the more “normal” consistent below trend signal has resumed”. “We expect that through the year growth in 2015 will be around 2.5%. That will be marked by below trend growth in consumer spending; sharp falls in mining investment; and flat business investment outside the mining sector”.
Weaker readings for US industrial production, Australian unemployment expectations, Australian consumer sentiment and commodity prices were the chief catalysts behind the sharp monthly slowdown.
Westpac, given the deterioration in the index, believes the RBA will cut interest rates in May and revise down their economic growth forecasts in their subsequent statement on monetary policy:
“The Minutes from the April Board meeting imply that the Bank is likely to revise down its growth forecasts in its Statement on Monetary Policy which will be released on May 8. With the sharp fall in commodity prices; a resilient Australian dollar; and a disappointing outlook for business investment it seems likely that the Board will decide to cut rates by 0.25% at the May meeting”.
That’s a good summary of consensus among economists and in markets right now.