The Westpac/Melbourne Institute Leading Index has just been released and its positing strong growth ahead in 2018 domestically.
This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018. However, in our view there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.
The Index has recovered from the slow patch in June/ August, and, for this month at least, is above the levels it enjoyed over the six months to May when the average growth rate reading was a solid +1.12%.
The boost to growth shows a healthy mix of both international and domestic factors providing further confidence around the near term outlook.
The Reserve Bank Board next meets on February 6. In the minutes to the December Board meeting the Board noted that: “How far and when stronger conditions in the economy and labour market feed into higher wage growth and inflation remained important considerations in shaping the outlook”. The Bank’s own underlying inflation forecasts are currently 1.75% in 2018 and 2% in 2019. It expects wages growth to increase gradually over the next year.
