Economy remains strong

It seems that Australia’s economy is well and truly on the mend with the Westpac-Melbourne Institute Leading Index at 6.2 per cent for December, well above the long terms trend of 2.7 per cent.

The Leading Index, which was released yesterday, indicates the likely pace of the economy three to nine months into the future. Matthew Hassan, Westpac senior economist, commented on the results.

“The Leading Index continues to point to a dramatic improvement in growth prospects. After hitting an extreme low of -6.9 per cent in May, the annualised growth rate in the Leading Index has bounced back to +6.2 per cent in December,” he said.

“This large swing is not only the fastest reversal since the economy bounced out of recession in the mid 1970’s but also puts the growth outlook back on a par with that seen in 2007 at the height of Australia’s resources boom.”

Hassan commented on the role the pause on interest rates played in this result.

“The minutes of the Bank’s February meeting revealed that its surprise decision to leave rates on hold was ‘finely balanced’,” he said.

“A key message from the Bank was that the situation no longer required moves at every meeting, i.e. the unwind of ‘emergency’ settings was now over and policy was now in a more normal mode of operation.”

Hassan said that he expects a rate rise to occur in the near future.

“Given the desire to send this signal, we believe the fact that February’s decision was still ‘finely balanced’ suggests there remains a pressing if not quite urgent need to adjust rates further from current levels,” he said.

“Decisions are likely to remain ‘finely balanced’ but our central case is still for another 25 basis point rise in March.”

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