Westpac leading index continues to fall

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Via Westpac:

• The six month annualised growth rate in the Westpac– Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell from –0.29% in December to –0.43% in January.

As discussed last month, despite some choppiness, the major trend is consistent with our view that growth has slowed from a solid above trend pace to one that is at or below trend going forward.

Over the eight months from September 2017 to April 2018 the growth rate averaged +0.78%. In the nine months since April the growth rate has averaged only +0.10% – a clear step down.

Those readings to April were consistent with the strong, above trend momentum in the official growth figures that showed the Australian economy growing at around an annualised pace of 4% in the first half of 2018. The September quarter national accounts revealed a marked step down in the growth rate printing only 0.3%, an annualised pace of just above 1%. Westpac expects that the growth momentum for the full second half of last year will come in at around 1.5% – well below trend and lower than indicated by the Leading Index but certainly consistent with the step down in average growth over the last eight months.

The growth pace in 2019 is expected to fall from the annual rate in 2018 of 2.7% to 2.6%.

This slowing growth environment is clearly emphasised by the Reserve Bank’s growth revisions in its February Statement on Monetary Policy where it lowered its growth forecast for 2018 from 3.5% to 2.75% and the 2019 forecast from 3.25% to 3.0% – still notably above trend and well above Westpac’s forecast.

We note that the Bank has, in particular, recognised a negative wealth effect impacting consumers as house prices fall, particularly in Sydney and Melbourne, while the residential construction downturn has deepened.

We have consistently highlighted those risks but also expect a slowdown in jobs growth and investment spending as both political uncertainty and global volatility weigh on firms’ employment and investment decisions.

The Index growth rate has shown a significant deterioration over the last six months, declining from +0.17% in August to –0.43% in January.

Four of the eight components have contributed to the fall: the S&P/ASX200 (–0.36ppts); dwelling approvals (–0.35ppts); US industrial production (–0.24ppts) and aggregate monthly hours worked (–0.05ppts).

Partially offsetting those sharp falls were: the Westpac-MI Unemployment Expectations index (+0.15ppts); the yield spread (+0.02ppts); commodity prices (+0.17ppts) and the Westpac MI CSI expectations index (+0.07ppts).

The Reserve Bank Board next meets on March 5. The minutes of the February Board meeting confirmed that the Board now sees the risks around the cash rate outlook as being more evenly balanced than had been the case in 2018 when it expected that the next move would be an increase.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.