The economy should continue to grow above trend in the first half of 2005, according to the Westpac-Melbourne Institute Leading Index of Economic Activity released today.
The Index's annualised growth rate, which indicates the likely pace of economic activity six to nine months out, was 4.9% in October, above the long-term trend of 3.9%, and 0.5% up on the previous reading.
The annualised growth in the Coincident Index which charts current activity, was 4.7%, ahead of the long-term trend of 4% - with the rise mainly due to the strong labour market.
Westpac's Bill Evans says the Index reading indicates annual growth of around 4% compared with 3% for most of 2004.
The expected higher pace of growth is attributed to a slowing in import growth combined with a pick-up in exports.
Additionally, he says a slowing of domestic demand will take some pressure of business, which is facing capacity constraints with respect to labour and capital.
However, Evans cautions that the Index's latest reading "gives little comfort" that domestic demand will slow much.
"In those circumstances we can expect to see continuing strong business investment and the ongoing risk of genuine wage pressures. While there is clear evidence of those wage pressures in certain sectors, such as construction and mining, the concern for the economy would be of those pressures became more widespread. Continuing strong demand will accentuate those risks," he says.
Ongoing demand pressures, says Evans, will ensure the Reserve Bank maintains its "tightening bias", although rates will not rise until there is "clear evidence that the pockets of wage pressures are spreading more widely in the economy".
"That evidence is likely to emerge sometime in the first half of 2005," he adds.
"Accordingly, Westpac retains its view that interest rates will be nudged up by 0.25 [percentage points] sometime in the first half of 2005."