WESTPAC: Rates are on hold and the near-term outlook for the Australian economy is good

Coogee beach. Brendon Thorne/Getty Images

It looks like the Australian economy will enjoy a strong period of growth in the coming months, according to the latest Westpac-MI Leading Index released earlier today.

However, there’s still plenty of uncertainty as to whether that will remain the case longer-term.

The report’s six-month annualised growth rate — which indicates the likely pace of economic growth relative to trend looking three to nine months into the future — came in at 1.02% in February, down fractionally on the 1.34% level in January.

Despite the slight moderation in February, the positive figure indicates that economic growth is still likely to be well above historic norms in the middle of this year.

Source: Westpac

As its name suggests, the Leading Index uses a variety of leading market and economic indicators — both domestic and abroad — to estimate how the economy is likely to perform in the future.

“The latest reads point to above trend momentum carrying through the middle of 2017, consistent with Westpac’s forecast for 3% growth for the full year,” said Bill Evans, chief economist at Westpac.

“February marks the seventh consecutive month where the growth rate in the index has been at or above trend. The improved momentum in the index is now evident in the economic data with the December quarter national accounts confirming a solid 1.1% rebound in GDP from a 0.5% contraction in the September quarter.”

While the index is pointing to strong economic growth in the coming quarters, Evans suggests that the factors driving the improvement provide something of a warning about whether the momentum can be sustained.

“So far the bulk of the uplift is coming from two external factors: commodity prices and the yield spread, the latter being driven by the rise in long term bond rates globally,” he says.

“The pulse from commodity price gains is already starting to dissipate and may turn negative if prices retrace. Similarly, the big moves in the yield spread have probably been and gone. Meanwhile other components are showing less convincing momentum.”

Both of those moves have been assisted by optimism towards the prospect of faster economic growth in the United States following the election of Donald Trump as president in November. Although, as has been seen in financial markets over the past 24 hours, there’s now increased investor nervousness as to whether or not Trump will be able to deliver on his campaign promises.

Evans says uncertainty over the longer-term outlook for economic activity both at home and abroad points to the RBA leaving rates firmly on hold at 1.5%.

“Westpac expects the cash rate to remain on hold throughout 2017 and 2018,” he says.

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