WESTPAC: Expectations for Australian economic growth continue to slide

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Australian economic growth looks set to drop below trend early next year according to the Westpac-MI leading index for July.

The index is used to determine likely deviation from Australia’s trend growth rate three-to-nine months in the future.

It incorporates information from a number of domestic markets, plus international activity, along with consumer expectations about activity and unemployment.

In July, the 6-month annualised deviation-from-trend growth rate fell by 0.51 percentage points to -0.49%, indicating the likelihood of below-trend growth in late 2015 and early 2016.

In June the reading was 0.02%.

Of the eight sub-components making up the leading index, two contributed to growth while six detracted.

Here’s Westpac on the detail:

“Of the two contributors to growth in July, the yield spread was the only component that made a substantial contribution (adding 0.44 ppt’). As with its contribution in June, the contribution of the yield spread continued to increase in July, reflecting growing traction of the Reserve Bank of Australia’s monetary easings in February and May on domestic financial conditions. The Westpac-MI CSI unemployment expectations index was the other contributor to growth in July though its contribution was relatively small (adding just 0.02 ppt’ in July or a total of 0.04 ppt’ over the last two months).

The commodity price index (subtracting 0.39 ppt’), US industrial production (subtracting 0.21 ppt’), dwelling approvals (subtracting 0.13 ppt’) and aggregate monthly hours worked (subtracting 0.13 ppt’) were major detractors to growth in July. While the commodity price index and US industrial production have featured in the negative-influence category for a while, dwelling approvals and aggregate monthly hours worked only turned detractors in July following a relatively long run in the positive-influence category (eight and six months, respectively). The S&P/ASX 200 index and the Westpac-MI CSI expectations index also detracted from growth in July (subtracting 0.02 and 0.07 ppt’, respectively)”.

As a result, growth in the Leading Index is now below trend and its readings over the last few months indicate activity is likely to remain weak until the end of 2015, according to Westpac.

To Bill Evans, the bank’s chief economist, the sharp deviation below trend growth creates doubt over prospects for growth next year compared to this and last year.

“The disappointment from the lacklustre Leading Index growth prints mid-year is that a lack of momentum going into 2016 might start to question the generally held view that 2016 will be a better year than 2014 and 2015. For example our own forecasts pitch growth in 2016 at around 3%, up from 2.5% in 2014 and 2015, while the Reserve Bank is also forecasting 3% growth in 2016, recently lowered from 3.25%”, said Evans.

Despite the weakening of the index, Evans believes there is little chance that the Board will choose to move rates when they next meet in September. He expects rates will remain on hold over the course of the remainder of this year and throughout 2016.

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