Leading Index rises from canvas

The Westpac/Melbourne Institute Leading Index for May is out and accelerated from its recent lows:

The annualised growth rate of the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 1.6% in May 2012, below its long term trend of 2.6%. The annualised growth rate of the Coincident Index, which gives a pulse of current activity, was 4.2%, well above its long term trend of 3.1%.

While the growth rate remains well below long term trend it is the fastest since September last year and is indicating that, while moderate, growth in the second half of 2012 and into 2013 will adopt an improving tempo. Westpac expects that growth in the
second half of 2012 will be around an annualised pace of 3% whereas growth in 2013 should lift to an around trend 3.5%.

That profile presumes further interest rate relief through the second half of 2012 although the current disposition of the monetary authorities appears to be to sit tight for the next few months in the wake of the surprisingly strong surge in growth in the first quarter of 2012. That print was driven by a surge in real consumer spending partly resulting from the near deflationary conditions which operated during the quarter. “Apart from mining other sources of spending – residential housing and business investment were soft and reliably in line with the signals from the Leading Index in 2011.

Hmmm, well, the Leading Index completely failed to lead the first quarter GDP boom. Having said that, the boom was based on a 1% GDP deflator, under which nominal growth was very weak, so maybe the index shouldn’t be completely thrown out.

Er 20120718 Bull Leading Index