Australia: Leading index points to below trend growth – Westpac

Bill Evans, Chief Economist at Westpac, explains that the six month annualised growth rate in the WestpacMelbourne Institute Leading Index for Australia, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell sharply from 0.51% in May to –0.76% in June.

Key Quotes

“The index is pointing to a slowdown in momentum in Australia’s growth profile with the first below trend reading since July 2016. The deterioration mainly reflects international factors including a sharp turnaround in Australia’s commodity prices in Australian dollar terms.”

“The Leading Index growth rate has slowed from 1.61% above trend in January to 0.76% below trend in June (a deterioration of 2.37ppts). Two components account for all of the reversal: commodity prices and the yield spread. After surging 42% over the second half of 2016, Australia’s commodity prices have fallen 17% over the first half of 2017 in AUD terms. The swing has seen this component alone go from adding 1.26ppts to the Leading index growth rate in January to subtracting 0.71pts off in June, a reversal worth 1.97ppts. Some of this reflects the unwinding of temporary policy and weather-related spikes in coal prices. However, a strong rally in iron ore prices through much of last year also moved into reverse from early 2017 through mid-June.”

“While we have seen a solid recovery in iron ore prices since mid-June in USD terms, the sharp increase in the Australian dollar from USD 0.755 to USD 0.79 will partly offset that adjustment.”