POPULAR WORDS

March 17, 2010

The annualised growth rate of the Westpac–Melbourne Institute Leading Index was 6.3 percent in December, well above its long term trend of 2.7 percent.

Indicating the likely pace of economic activity three to nine months into the future, the annualised growth rate of the Coincident Index was 3.9 percent, also above its long term trend of 3.2 percent.

Westpac Senior Economist Matthew Hassan says after rising sharply over the second half of 2009, the Leading Index continues to point to strong momentum carrying into 2010.

“Although the annualised growth rate in the Index held steady in January – ending the rapid month to month acceleration seen since May last year – it remains well above its long run average, on a par with previous cyclical highs,” Hassan says.

“Moreover there are now clear signs that the pick-up foreshadowed by the Leading Index is showing through in actual activity with the annualised growth rate in the Coincident Index rising back above trend for the first time since September 2007,” he says.

COMPONENT BREAKDOWN

In terms of individual Index components, the remarkable growth turnaround from –0.4 percent in August 2009 to 6.3 percent in January has been driven by: industrial commodity prices (+2.5 ppt's); US industrial production (+2.4 ppt's); real corporate profits (+1.4 ppt's); productivity (+1.1 ppt's); domestic labour market conditions (+0.4 ppt's) and dwelling approvals (+0.2 percent).

However, these positives were partially offset by contractions in the real money supply (–1.1 ppts), partly reflecting tighter credit conditions, and the share price index (–0.1 ppt's).

The level of the Leading Index rose by 0.5 points (0.2 percent) in January, according to new data out today.

Two of the four monthly components of the Index fell, one held steady and one rose.

The share price Index fell 6.2 percent in January, although the All Ordinaries has since regained most of this loss.

Dwelling approvals also fell by 7 percent in January after several strong monthly gains.

The real money supply component was flat in January and US industrial production rose 0.9 percent,

OUTLOOK

With the Reserve Bank Board next convening on April 6, Hassan explains minutes form the last meeting show members saw further gradual moves in rates towards more normal levels as appropriate.

“Domestic indicators were seen as pointing to a strengthening in activity, with the Board even noting that ‘growth might already have been running at or close to trend’. This is certainly the message coming from the January Leading and Coincident Indexes,” he says.

“That said there is still less urgency to the ‘gradual’ tightening moves than there was to the initial moves to unwind ‘emergency’ rate settings late last year,” he says.

Considering rates are now much closer to neutral, recent wage outcomes suggesting inflation is more likely to remain well contained near term and some residual uncertainty about surprisingly weak housing finance data, Westpac expects the RBA to again opt for a pause in April.

“However, we continue to expect a resumption in the gradual tightening in May with a further 25bp rate hike forecast and a final hike taking the cash rate to 4.5 percent in Q3,” Hassan adds.