Australia to have Weak Economic Growth

AAP
August 17, 2011

SIGNS that Australia is headed for its weakest patch of economic growth in two years are increasing, driven by consumer and business caution, higher savings rates, rising unemployment and a weak building sector.

The Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was at 1.6 per cent in June, below its long-term trend of three per cent.

It was the second month in the row that the index has printed at 1.6 per cent, after slumping to the low level in May from 2.7 per cent in April.

Westpac chief economist Bill Evans said weak growth in consumer spending, higher savings rates and weakness in residential and non-residential building would contribute to below trend growth for the rest of 2011.

Westpac expected an annualised growth rate of 2.5 per cent in the second half of 2011, he said.

Mining investment would remain strong, but there was likely to be some correction to the investment plans of firms servicing the non-mining sectors.

“The growth rate in the index has steadily fallen from its peak in this cycle of 9.5 per cent in March 2010,” Mr Evans said.

“This is now the lowest growth rate for the index since August 2009.”

Westpac expected unemployment to rise to 5.5 per cent in the first half of 2012, Mr Evans said.

“With governments consolidating fiscally and households and firms deleveraging, and relative prices changing, economic activity is being diverted away from services and manufacturing to mining and mining construction, which are not intensive users of labour,” he said.

The growth rate of the Leading Index has slowed over the past six months, from 3.3 per cent to 1.6 per cent.

Mr Evans said key downside factors were a fall in real money supply (down 0.7 per cent), dwelling approvals (-3.5 per cent) and the S&P All Ordinaries Index (-2.1 per cent).

Growth in the Coincident Index, which measures current economic activity, was 0.1 per cent, below its long-term trend of 2.8 per cent.

That was due to a slump in retail trade, the slowdown in employment and the disruption to production in the first quarter of 2011 due to flooding in Queensland.

Mr Evans said evidence was emerging to support his view that the Reserve Bank of Australia (RBA) would cut rates by 25 basis points by the end of the year.

However, he said, further evidence that inflation risks had receded would be necessary before the RBA made a case to cut rates.