The Westpac-Melbourne Institute
Leading Index, released this week, points to strong growth ahead for the Australian economy.
The Index, which indicates the likely pace of economic activity six to nine months into the future, was 6% in July, well above its long-term trend of 3.7%. The annualised growth rate of the
Coincident Index was 4.1%, ahead of its long-term trend of 3.8%.
Westpac senior economist Bill Evans says "this is a very strong result".
"The 6% growth pace is due to a sharp upward revision on growth following the inclusion of the June quarter national accounts. Growth in June was previously reported as a solid 4%, but with the inclusion of the national accounts growth was revised up to 6.1% for the year to June," he says.
"The reported 6% growth rate for July is now higher than the previous cyclical peak in growth of the Index, which occurred in June 2003.
"The Index is now emphasising that growth in the economy is likely to be comfortably above long-term trend, and accelerating near the end of 2004 and into 2005. With the residential construction cycle peaking, the growth profile emphasises the likely supports to growth from exports, business investment and consumer spending."
Evans says GDP growth in the first half of 2004 has averaged around 0.5% a quarter and this is forecast to pick up to 0.9-1% in the final quarter of the year and the first quarters of 2005.
"The
Leading Index certainly supports that view," he says.
"Two monthly components of the
Leading Index - non-residential building (up 50.4%) and the share price index (up 0.1%) - rose, while two components fell - dwelling approvals (down 0.7%) and the real money supply (down 0.4%).
"The June quarter national accounts showed sharp increases in corporate profits and labour productivity that were mainly responsible for the substantial upward revision in growth rates."
The growth rate in the
Coincident Index, which measures the current pace of economic activity, has now fallen well below that of the
Leading Index, indicating that economic conditions will improve, Evans notes.
"The Reserve Bank will not change interest rates at its next meeting, which is in the last week of the election campaign. Markets have now priced out any further move in rates as far as the eye can see.
"Yet indicators such as consumer sentiment, business confidence and the
Leading Index are pointing to the need for higher rates. We maintain our long-held view that the rates will raise in December," he says.
To read a detailed report on the future direction of the Australian economy, based on forecasts from leading long-term forecaster BIS Shrapnel, see the October edition of QBR magazine, out early next month. Call 1800 649 578 or email subs@pubserv.com.au to subscribe and secure your copy - as well as the official 2004 Queensland 400 magazine and the 2003/04 and 2004/05 editions of the Book of Lists.