Australia’s Economy Poised to Reaccelerate

By Ari Charney • September 19, 2013 • Pacific Digest

Two key indexes of leading economic indicators show the possibility of a stronger Australian economy in the months ahead, though current conditions down under remain challenging.

The Westpac-Melbourne Institute Leading Index, which is used as an indicator of economic growth over the next three to nine months, rose to a 4.1 percent annualized rate in July, up seven-tenths of a percentage point from June. That’s well above the long-term trend of 2.9 percent, though below February’s strong reading of 5.5 percent. Regardless, the index suggests a resurgent economy in the months ahead.

The eight components of the index include the following: the All Ordinaries Index, overtime worked, manufacturing materials prices, US industrial production, productivity, real corporate gross operating surplus, real money supply, and dwelling approvals.

Six of these eight components factored into the index’s deceleration since February, while real money supply and dwelling approvals were both higher since then. Of the components for which monthly data is available, three out of four rose in July: the All Ordinaries Index, which was up 5.2 percent, dwelling approvals, which jumped 10.8 percent, and the real money supply, which increased 0.4 percent.

Meanwhile, the latest reading from the companion Coincident Index, which measures current economic activity, came in at just 2.4 percent, up six-tenths of a percentage point from the prior month, but still five-tenths of a percentage point below the long-term trend.

Similarly, the Conference Board Leading Economic Index for Australia rose three-tenths of a percentage point month over month in July. Even better, the trailing six-month period provided a meaningful contrast with the period that preceded it: The index rose at a 0.7 percent annualized rate during the first half of this year, while during the latter half of 2012, it actually declined at a 1.5 percent annual rate.

Four of the seven components that comprise the Conference Board’s index are identical to the ones used for the Westpac-Melbourne Institute’s index, with the key differences being that the former incorporates the yield spread, the sales-to-inventories ratio, and rural goods exports instead of overtime worked, manufacturing materials prices, US industrial production, or productivity.

The Conference Board’s Coincident Economic Index also shows headwinds remain in the near term, as evidenced by a decline of two-tenths of a percentage point in July, with a 0.9 percent annualized decline for the trailing six-month period.

Also this week, the Reserve Bank of Australia (RBA) published the minutes from its monetary policy meeting earlier this month. The bank appears to essentially maintain its easing bias, with language that refused to close off the possibility of reducing rates further, while also declining to signal that further rate cuts are imminent.

Continued easing should help increase the size of the real money supply, a component of both of the aforementioned indexes of leading economic indicators. To that end, Westpac Chief Economist Bill Evans believes that another rate cut could come as soon as the RBA’s November meeting. The central bank has been on a rate-cutting cycle since late 2011, and its cash rate now stands at an all-time low of 2.5 percent.

The Australian economy has been decelerating since gross domestic product (GDP) growth hit a post-Global Financial Crisis high of 4.5 percent annualized in the first quarter of 2012. Since then, GDP growth has fallen as low as 2.5 percent in the first quarter of this year, though second-quarter growth of 2.6 percent exceeded the consensus expectation by two-tenths of a percentage point.

Bloomberg’s survey of 32 economists shows the median forecasts for the third- and fourth-quarters are for growth of 2.4 percent and 2.3 percent, respectively. Over the long term, the Australian economy has grown at a rate of 3 percent annually, and economists are not projecting a rebound to that level until 2015. However, this year appears to be an interim bottom, with the expectation that growth will start accelerating gradually again by the first quarter of 2014, which is essentially in line with the leading economic indicators.

The Roundup

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers. Some have “confirmed” dates, while for others we’ve provided an “estimate.”

For most, this will cover the full fiscal year ending June 30, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

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