The Westpac – Melbourne Institute Leading Index has recently released data indicating that the pace of economic growth will rise later this year. The Index presents and studies changes in the leading indicators of economic activity. The six month annualised deviation of the trend growth rate increased from -.32 per cent in January to +.45 per cent in February. This is the first time the Index has been above trend since January 2014. The improvement has largely come from the reduced drag from falling commodity prices. “Note that the reduced drag from falling commodity prices is mainly due to a lower exchange rate with this component measured in AUD terms,” said Matthew Hassan, Senior Economist with the Institute. Other positive indicators included aggregate monthly hours worked, a moderate increase in the Westpac MI Consumer Sentiment Expectations Index after the rate cut and from an additional increase in dwelling approvals.
The extent to which this improved growth can be maintained is unknown at this time. Regarding the recent data from the Index, Mr. Hassan warns, “It suggests that the Australian economy will start to regain some momentum towards then end of this year, although it remains to be seen how well this pick-up is sustained.” He has also echoed sentiments from other analysts regarding a potential interest rate cut later this year. Mr. Hassan is projecting that the RBA will reduce the interest rate to 2 per cent in either April or May. According to the RBA, the benefit of an additional cut would be partially dependent on borrows and holders of interest-bearing assets. “They noted that the interest payments made by borrowers are significantly larger than the income received by holders of interest-bearing assets and, as a result, the very low level of interest rates was acting, other things equal, to support aggregate disposable income available for consumption” board members concluded in the most recent minutes report.
Author: Simon Herrmann
Mar 18, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.