Leading Index May 2010

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Westpac – Melbourne Institute Indexes of Economic ActivityJuly 2010

The level of the Westpac – Melbourne Institute leading index of economic activityincreased 0.4 points (0.2 per cent) in May while the annualised growth rate deceleratedfurther, to 6.7 per cent, from 7.5 per cent in April and 8.6 per cent in March.On a more positive note, the coincident index increased 1.1 points (0.4 per cent) (seeTable 1) in May. The annualised growth rate rebounded to 3.7 per cent, 0.6 percentagepoints above its long term trend. The Westpac Melbourne Institute Consumer SentimentIndex also showed some positive signs. The index rose 11.1 per cent in July, reversinglosses in the previous three months.

Table 1: Indicators of activity

Dec-09Jan-10Feb-10Mar-10Apr-10May-10

LeadingIndex level (1980=100)259.3260.5262.0264.3264.3264.7Growth rate (annualised)6.97.37.88.67.56.7Trend growth (annualised)3.03.03.03.03.03.0CoincidentIndex level (1980=100)248.2249.7249.4250.3251.3252.4Growth (annualised)2.13.02.62.93.33.7Trend growth (annualised)3.23.13.13.13.13.1

Chart 1: Leading index (growth)

-9-6-30369May-00 May-02 May-04 May-06 May-08 May-10%-9-6-30369%

Actual Trend

Chart 2: Coincident index (growth)

-9-6-30369May-00 May-02 May-04 May-06 May-08 May-10%-9-6-30369%

Actual Trend

The leading indexdecelerated further in May……while the coincident index displayed a moreositive note.

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Leading and coincident indexes for a number of key economies are in Table 2. Thoughglobal growth is still positive, a concerted deceleration seems imminent. The questionnow is whether the world can ward off a double dip recession. The odds seem stackedagainst avoiding the double dip as economies are starting to implement fiscal austeritypackages to address large budget deficits, particularly in the European Union. But by farthe most worrying aspect of the lackluster rebound from the Great Recession is that itmay be a sign that there is something fundamentally wrong with the global economy. It’sbeen almost two years since the collapse of Lehman Brothers yet a clear rebound inactivity remains illusive.So far, the US economy remains on a recovery path supported in the near term by thefiscal and monetary policy stimuli and a boost from the inventory cycle. But a sustainedrebound seems unlikely without a firm recovery in the labour market. Though the USunemployment rate declined to 9.5 per cent in June, the fall was entirely driven by a fallin the participation rate. The number of long term unemployed (those jobless for 27weeks and over) make up about half (45.5 per cent) of all unemployed persons.The outlook for the euro area remains soft. High unemployment is also plaguing Europe.The area’s unemployment rate now stands at 10 per cent. The German economy is adriver of the modest recovery but with a weakening in global prospects, trade dependentGermany may not be able to hold on to the rebound.In Japan, real GDP grew 1.2 per cent in the first quarter. The economy is expected toremain on a recovery trend but, growth momentum is likely to slip in the course of 2010following the waning impact of fiscal stimulus measures on domestic consumption and astabilisation in the growth of net exports.In China, real GDP growth decelerated to 10.3 per cent year on year in the June quarter.Though growth remains robust, worries persist about rising inflationary pressures, a surgein house prices and possible bad debt at state owned banks following record lending in2009.

Table 2: International indicators

One monthagoOne monthagoUnited States4.72.9MaySlow/Average2.73.1MayAverageCanada14.110.0AprAverage4.54.0AprAverageMexico2.01.6AprSlow/Average4.44.1AprAverageGermany11.412.1AprAverage2.93.3AprAverageFrance8.69.7AprAverage2.12.8AprAverageUnited Kingdom3.32.4AprAverage0.50.7AprAverageItaly17.79.7AprSlow/Average-0.90.4AprSlow/AverageSpain1.00.4AprRecessionary/Slow-0.5-1.0AprRecessionary/SlowSwitzerland7.97.1AprAverage1.92.2MarAverageSweden14.115.7AprAverage2.94.3AprAverageJapan13.811.5AprAverage6.85.7AprAverageChina9.76.5AprAverage16.212.7MarAverageIndia-5.71.5AprAverage13.810.4MarAverageSouth Korea14.016.4AprAverage8.89.0AprAverageTaiwan11.812.7AprAverage17.217.5AprAverageNew Zealand9.78.1AprSlow/Average1.71.8MarSlow/AverageLeading indexes: per cent growth ratesCoincident indexes: per cent growth ratesSource: Economic Cycle Research Institute,

International Cyclical Outlook

, June 2010Annual rates (per cent)Latest monthLatest month

Around the world

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Components of the Leading Index

1

Two of the four monthly components of the leading index rose in May and two fell. The real money supply and USindustrial production rose 0.7 and 1.3 per cent while the all ordinaries index and dwelling approvals fell 7.8 and 6.6per cent.Three of the four quarterly components of the leading index, rose in the March quarter and one fell. Overtimeworked, manufacturing materials prices and real corporate gross operating surplus rose 5.0, 2.0 and 1.9 per centwhile productivity fell 0.7 per cent in the quarter.Contributions of the components to the annualised growth of the leading index are presented in Table 3.Contributions from US industrial production remains the strongest driver while contributions from the all ordinariesindex and dwellings are now zero. This suggests that so far, downward pressures on GDP from domestic factors arecounteracted by upward pressures from overseas. With the deterioration in the global outlook, it is not clear howlong this can continue.

Table 3: Contributions of the components to the annualised growth rate of the leading index

2

Dec-09Jan-10Feb-10Mar-10Apr-10May-10

All ordinaries index1.10.70.60.80.50.0Real money supply0.10.10.20.50.40.6Dwelling approvals1.30.90.71.10.40.0United States industrial production1.21.71.61.71.82.2Manufacturing materials prices-0.9-0.10.50.81.01.1Overtime worked2.12.12.11.71.20.8Productivity1.91.91.91.71.51.2Real corporate gross operating surplus0.10.10.10.40.60.8Index6.97.37.88.67.56.7

1

Source data were obtained via the ABS and Reserve Bank websites, the Federal Reserve Bank of St. Louis FRED® database and the

ACCI-Westpac Survey of Industrial Trends

.

2

The annualised growth rate of the leading index represents the smoothed growth in the index over the previous twelve months centered at sixmonths. The contribution of a given component to the annualised growth rate of the leading index may therefore be positive (negative) even if the contribution of that component is negative (positive) in the most recent month. Due to rounding errors the sum of the contributions of eachcomponent of the leading index may not exactly sum to the annualised growth rate of the leading index.

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