Bulletin

18 April 2012

Leading Index growth remains lacklustre

The annualised growth rate of the WestpacMelbourne

Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.4% in February 2012, below its long term trend of 2.9%. The annualised growth rate of the Coincident Index, which gives a pulse of current activity, was 2.3%, also below its long term trend of 2.9%.
12 9 6 3 0

Westpac-MI Leading Index

% ann
six month annualised growth rate

% ann
long term trend

12 9 6 3 0 -3

This is the sixth consecutive month that the growth rate in the Leading Index has been below trend. The growth rate has picked up somewhat from the absolute low in November last year but the modest decline in February does not encourage too much optimism that growth is likely to exceed trend any time soon. That profile is consistent with Westpacs forecast for growth in the Australian economy in 2012 of 3% which would mean that Australia had grown below trend for five consecutive years. The Index growth rate has returned to its level of 2.4% from six months ago. Over that period there has been a modest rebalancing of the components with the share market increasing its contribution to growth by 0.7 ppts being offset by a reduction of 0.8 ppts from the contribution of overtime worked to the growth rate. For the February month, the level of the Index rose 0.5 points from 283.7 in January to 284.2. Two of the monthly components rose, one was unchanged and one declined. The All Ordinaries index rose 0.8%, while the real money supply was up 0.1%. Dwelling approvals contracted by 7.8% while US industrial production was unchanged. The growth rate of the Coincident Index also continues to track below trend, indicating patchy growth. The level of the Index rose from 271.7 in January to 271.9 in February. Real retail sales and employment both decreased by 0.1% while unemployment increased by 0.1%.

-3
recession

-6
Sources: Westpac-Melbourne Institute

-6 -9 Feb-92 Feb-96 Feb-00 Feb-04 Feb-08 Feb-12

-9 Feb-88

The Reserve Bank Board meets on May 1. Following the release of the Board Minutes for the previous meeting on April 3 it is apparent that the case for a rate cut is strong. The Board is concerned about the sharp differences between sectors and regions; recognises that there is a significant fiscal tightening; and notes that non mining investment was likely to remain sluggish. There is a clear observation that, subject to the inflation outlook remaining benign, there is scope to cut rates. Westpacs forecast for the inflation print for the March quarter, which will be released on April 24, is consistent with an ongoing benign outlook providing adequate scope for a 0.25% rate cut on May 1. Bill Evans, Chief Economist

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