In its recent Statement on Monetary Policy, the Reserve Bank of Australia said economic growth was likely to rebound in the years ahead, pushing aside the shock 0.5% GDP contraction in the September quarter last year that it said was largely driven by temporary factors.
If the latest Westpac-MI Leading Index is anything to go by, that assessment appears to be on the money for the moment.
The indice’s six-month annualised growth rate — which indicates the likely pace of economic activity relative to trend looking three to nine months into the future — came in at 1.3% in January, down fractionally on the 1.36% level in December.
Despite the fall, at 1.3%, it still points to strong economic growth in the middle parts of 2017, and well above the levels that deemed to be around historic norms.
“This marks the sixth consecutive month where the growth rate in the index is at or above trend,” said Bill Evans, chief economist at Westpac.
“The run of above or at trend readings is signalling a better outlook for the first half of 2017.
“In particular, whereas over the September–November period the index had been losing momentum, albeit still in positive territory, the December and January results represent a very strong rebound.”
While an impressive boost, and one that bodes well for economic growth in 2017, Evans says that the improvement was driven by a “narrow group” of the survey components, and largely reflected offshore rather than domestic factors.
“The key drivers of that improvement have been rising commodity prices (0.82 percentage points), the steepening of the yield curve (0.51 percentage points), average monthly hours worked (0.38 percentage points) and US industrial production (0.01 percentage points),” he said.
On the other hand, he said there was a considerable drag from the ASX 200 (–0.29 percentage points), dwelling approvals (–0.25 percentage points), the Westpac–MI Unemployment Expectations index (–0.14 percentage points) and Westpac-MI Consumer Sentiment Expectations Index (–0.01 percentage points).
So most of the factors that have drove the improvement have been linked to the global economy, helping to override weakness in the indices domestic components.
Despite the narrow nature of the improvement — something that warrants caution — Evans says that he agrees with the RBA’s forecasts for GDP growth of 3% growth in 2017, noting that the “growth rate is above trend and consistent with the positive leads from the index over the last six months”.
However, while he agrees with the RBA’s short-term forecasts, that optimism doesn’t extend beyond the current calendar year.
“Certainly we have more concerns for growth beyond 2017. Prospects for growth in 2018 look discouraging,” says Evans.
“Housing construction is likely to be contracting through 2018 while export growth will slow and the terms of trade are likely to be falling, slowing nominal income growth.
“Prospects for an offsetting boost from household spending and business investment are not encouraging,” he adds.
So while 2017 looks like it will be warm and sunny, the storm clouds, in Evans’ view, are building on the horizon.
Despite those potential downside threats, Evans says that Australian interest rates will remain on hold through 2017 and 2018. He also says a substantial correction to the Australian dollar will provide considerable relief for growth prospects in 2019.