Points to solid economic growth for 2017 first half.

The latest Westpac-Melbourne Institute Leading Index rose from 1.14 per cent in February to 1.17 per cent in March. The six month annual growth rate in the Index indicates the likely pace of economic activity three to nine months into the future.

It marks the eighth consecutive month where the growth rate in the Index is at, or above trend, and follows 15 months when growth rate has been below trend.

Westpac’s chief economist, Bill Evans said the resumption of positive growth in the Index in August 2016 indicated the bounce back in growth in the December quarter to 1.1 per cent could have been anticipated.

“While the strong bounce back in the December quarter was partly statistical in response to the negative quarter in September, the ongoing positive signal from the Index gives us some comfort that we can expect solid growth in the first half of 2017,” he said.

Evans said in the April minutes from the Reserve Bank’s monetary policy board meeting  released on April 18, the statement included in the March minutes: “year-ended growth was expected to pick up gradually to be above its potential rate over the forecast period,” was excluded.

“It may be that the bank is considering lowering its growth forecasts given its concerns with the labour market, wage incomes and the feedback loop to consumption,” he said.

“However we do have concerns for growth beyond 2017 and prospects for growth in 2018 look discouraging. Housing construction is likely to be contracting through 2018 while export growth will be slow. Prospects for an offsetting boost from household spending and business investment are not encouraging either.”

Evans said the Reserve Bank is certain to keep rates on hold when it next meets on May 2 with concerns about excessive household leverage boosted by rising house prices.

“While this concern might be alleviated by a rate hike the real economy is in no shape to deal with higher rates.  Considerable spare capacity persists in a labour market with the unemployment rate stuck at about one percentage point above the full employment level. Inflation remains below the bank’s target zone and is expected to remain at the bottom of the zone and incomes and confidence are restraining consumption.

“The authorities are opting for a policy mix of steady official rates and heightened regulatory controls around the housing market.  In the bank’s board minutes for April it was noted that, depending on how the system responds to the various measures, the Council of Financial Regulators would consider further measures if needed,” Evans said.