Finance Finance News Australia economic growth to weaken

Australia economic growth to weaken

Bill Evans
AAP
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Australia’s economic growth later this year may not get much stronger, as consumer sentiment and employment expectations remain weak.

Westpac chief economist Bill Evans says the Westpac/Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, has stayed below zero for the second month in a row, indicating that economic growth will be below trend.

“The index has slowed markedly from the above trend pace of late last year,” he said.

“Since October, the Index has slowed from 1.21 percentage points (which is) above trend to 0.09 percentage point (which is) below trend.

“Major contributors to that slowdown were: the yield spread, the Westpac/MI Consumer Sentiment Expectations Index, dwelling approvals, the Westpac/MI Unemployment Expectations Index.”

The Westpac/Melbourne Institute Leading Index rose to -0.09 per cent in March from -0.15 per cent in February.

Mr Evans said Westpac now was forecasting no more Reserve Bank of Australia interest rate cuts. The central bank last cut the interest rate, to a record low 2.5 per cent, at its August board meeting.

“The Reserve Bank is currently forecasting growth at 3.5 per cent in 2015,” Mr Evans said.

“It will need to see the emergence of sustained below-trend growth in 2014 with little prospect of a lift in 2015 before it would contemplate lower rates.

“The modest below-trend growth in the Index is, at this stage, insufficient evidence to prompt the Bank to make such a call.”

Mr Evans said strong growth in 2011/12 had been buoyed by investment in mining equipment.

However, growth in 2011 and 2012 was being boosted significantly by mining investment, new engineering construction surged 47 per cent and 37 per cent respectively, whereas in 2013 mining investment became a drag on growth.

“Our estimates of mining equipment investment tell a similar story – up 42 per cent and 27 per cent respectively in 2011 and 2012, and down by 40 per cent in 2013.”