Westpac-Melbourne Institute Leading Index growth rate slows

The six month annualised deviation from trend growth rate in the Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, decreased from -0.13% in October to -0.21% in November.

This result is a little disappointing. In the two previous months we had seen some modest improvement in the growth rate raising hopes that growth in the Leading Index might exceed trend by year's end. Unfortunately, the set-back in this result leads to the more general conclusion that growth in the Leading Index remains stuck below trend. The growth rate has now been below trend for the last five months. That is indicating that growth in the Australian economy in the first half of 2016 will be below trend. 

The Reserve Bank has slightly different forecasts of 2.25% for 2015/16 and 2.5%-3.5% in 2016/17. Using the mid-point of the Bank's forecast range we can see a slightly more cautious outlook in the near term but more optimistic outlook further out than the Westpac and Government forecasts. The Reserve Bank does provide sufficient information to impute their forecast for the first half of 2016 with a trend pace of around 2.75% implied. 

In summary it appears that the signal from the Leading Index is slightly more down beat on growth in the first half of next year than the RBA. This signal will warrant further scrutiny over the next few months.

Over the last six months growth in the Index has slowed from 0.01% above trend to 0.21% below trend. Components of the Index which have contributed to the slowdown are: ASX 200 (-0.38 percentage points); dwelling approvals (-0.13 ppt's); yield spread (-0.37 ppt's); and aggregate monthly hours worked (-0.17 ppt's).

The Reserve Bank board meets next on February 2. Since the last rate cut in May this year Westpac has assessed that rates will be on hold throughout 2015 and 2016. The key dynamic that would be responsible for a need for lower rates would be the impact of falling terms of trade on incomes and spending. With further falls in the household savings rate; an expected sub USD 0.70 Australian dollar; and ongoing solid employment growth that prospect seems unlikely.