The Westpac – Melbourne Institute of Leading Index of Economic Activity was released on Wednesday. The index, which indicates the likely pace of economic activity three to nine months in the future, saw growing trends falling back into negative territory. Indicators fell .64 percentage points to -.14 in March from .50 in February. “This is a disappointing but not surprising result. After being negative, and therefore projecting below trend growth in the three to nine month “window”, in the February to December period last year the growth rate lifted encouragingly in February to above trend. However that has proved to be short lived and the more “normal” consistent below trend signal has resumed,” said Westpac Chief Economist Bill Evans. Westpac expects below trend growth for the remainder of 2015.
As expected, the recent fall in commodity prices weighed on Australia’s trade and associated income growth. Mining production will be affected and will likely force miners to reassess their strategies concerning production. Dwelling construction is expected to increase once again. The sector saw a 16.5 per cent increase in 2014 and will likely see strong growth in 2015 as builders respond to increased demand from both domestic and foreign investors. The negative growth rate trends in the index aligned with the Reserve Bank’s revised forecasts for 2015. Westpac believes the RBA minutes in April implied that an additional interest rate cut might happen in May. The primary factors for the sharp decline in the growth rate between February and March have been attributed to weak data from US industrial production (-0.25ppts), Westpac-MI Unemployment Expectations Index (-0.23ppts), Westpac-MI Consumer Sentiment Expectations Index (-0.13ppts), dwelling approvals (-0.13ppts) and commodity prices (-0.10ppts).
Despite the deterioration this month, the deviation trend over the past six months has improved from -0.62 per cent to -0.14 per cent. The main contributing factors are the ASX 200 (0.31ppts), commodity prices (0.29ppts), aggregate monthly hours worked (0.27ppts) and dwelling approvals (0.16ppts). Westpac believes the RBA is likely to announce an interest rate cut on May 5, one week before the Commonwealth Budget is released. The main contributing factors to the likely interest rate cut are the sharp fall in commodity prices, a resilient Australian dollar and a disappointing outlook for business investment. Westpac expects the RBA to cut rates by 0.25 per cent in May. Growth in 2015 is expected to be around 2.50 per cent.
Author: Simon Herrmann
Apr 22, 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.