Australia: Leading index points to moderating growth pulse – Westpac

The six month annualised growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of Australian economic activity relative to trend three to nine months into the future, eased from 1.01% in April to 0.62% in May, explains Matthew Hassan, Senior Economist at Westpac.

Key Quotes

“The index is pointing to a clear slowing in momentum. While the growth rate remains comfortably above trend, the pace has eased markedly since the start of the year. The shift mainly reflects a less supportive backdrop for Australia’s commodity prices and in global financial markets.”

“The Leading Index growth rate has slowed from 1.59% in December to 0.62% in May. Two components have driven the slowdown: commodity prices and the yield spread.”

“After surging 44% between June and February, Australia’s commodity prices have declined 10% over the last three months. The turnaround has taken 1.17ppts off the Leading index growth rate since end 2016. Some of this reflects the unwind of temporary policy and weather-related spikes in coal prices. However, a strong rally in iron ore prices through much of last year has also moved into reverse since early 2017. Both moves look likely to be sustained.”

“The Reserve Bank Board next meets on July 4. Recent comments indicate that policy is firmly on hold with the Bank expecting growth to increase gradually to an above trend pace. The Leading Index has been pointing to above trend momentum since late last year but the latest updates suggest the growth pulse is moderating heading into the second half of 2017 highlighting downside risks to the 2018 growth outlook. We expect the Bank to leave rates unchanged over the rest of 2017 and throughout 2018.”