NEWS - Economy
Published 10:30 AM, 21 Oct 2009
Last update 10:53 AM, 21 Oct 2009
Westpac-Melb Institute economic activity index climbs to 1.7%
By a staff reporter
A leading index of economic activity has posted its first positive reading of annual growth since September 2008, adding to a spate of indicators which suggest a strengthening in the Australian economy.
The Westpac-Melbourne Institute leading index, which gives an indication of the likely pace of economic activity three to nine months into the future, jumped 1.1 per cent in August to an annualised rate of 1.7 per cent.
"The current sharp improvement in the growth rate of the leading index strongly supports the view that the Australian economy is moving onto a much stronger growth trajectory in 2010," Westpac chief economist Bill Evans said in a statement.
“It is certainly supportive of Westpac's forecast that GDP growth in Australia will increase from 1.5 per cent in 2009 to four per cent in 2010."
Mr Evans said the strong reading for August reinforced the need for the Reserve Bank of Australia (RBA) to lift interest rates further, following a 25 basis point rise earlier this month.
"Recent speeches and reports from the [RBA] indicate particular unease with the bank's forecast that underlying inflation will move back from its current read of 3.9 per cent to two per cent by the end of 2010," he said.
"The release of the September quarter inflation data on October 28 may show that the quarterly pace of underlying inflation has actually picked up.
"In those circumstances a decision to raise rates by 50 basis points in November would not surprise."
Mr Evans said the pace of recovery in the index – which rose from an annualised rate of -6.9 per cent in May to 1.7 per cent in August – was remarkable and outperformed similar readings taken after recessions in the late 1980s and early 1990s.
He said the main contributors to the index's rise in August were domestic labour market conditions (up 2.4 percentage points since May), US industrial production (up two percentage points), and share prices and corporate profits, which each rose by 1.3 percentage points.
"These components are capturing the key themes behind the improving prospects for the economy in 2010 – global recovery; considerable improvement in prospects for the labour market; sharp improvement in financial markets; better outlook for corporate profits; resurgence in housing market; recovery in commodity prices; and improved productivity," Mr Evans said.
"The index is also signalling the key risk for 2010 as global credit markets remain difficult and interest rates continue to rise both the demand and supply of credit are likely to be headwinds."
Annualised growth to August remained below the index's long-term trend of 2.8 per cent.