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Australia's economic slowdown could be entrenched, according to leading indicators

  • Australian economic growth slowed sharply in the second half of last year. Recent leading economic indicators suggest growth will remain sluggish over the remainder of 2019.

  • The Westpac-MI Leading Index points to the economy growing around 2.3% per annum, the same pace seen in 2018.

  • That growth pace is below the level that would normally help to lower unemployment and boost inflation.

  • Westpac forecasts the RBA will cut Australia's cash rate to 1% by August in an attempt to bolster the economy.

Australian economic growth looks set to remain sluggish for some time yet, continuing the slowdown seen in the second half of last year.

The Westpac-MI Leading Index, an indicator that uses a variety of local and international economic indicators to predict Australian economic growth looking three to nine months into the future, slumped to -0.47% in April, down from -0.13% in March.

Image: Westpac Bank

The latest result suggests economic growth will be 0.47% below Australia’s trend growth rate, widely regarded as around 2.75% per annum, until the end of 2019.

So around 2.3%, the same pace the economy grew in the 12 months to December last year.

Trend growth is the level where the economy is expanding at a sufficient pace to keep unemployment and inflationary pressures stable.

Right now, inflation is weakening and unemployment is starting to drift higher, adding credence to the recent signals offered by the Leading Index.

"The Index growth rate has been consistently negative over the last five months, a clear signal that economic growth through the three quarters of 2019 is likely to be below trend," said Bill Evans, chief economist at Westpac.

“This consistent ‘below trend’ signal from the Index is in line with Westpac’s growth forecast for 2019 of 2.2%."

This table from Westpac shows the contribution of each leading indicator to the overall Leading Index level.

Had it not been for a surge in Australian stocks, partially reflecting increased odds of RBA rate cuts in the months ahead, the headline index would have been even lower last month.

Image: Westpac Bank

With official GDP, inflation and unemployment data from the ABS all weakening, and given the signals from the Leading Index, Evans says the Reserve Bank of Australia (RBA) will need to stimulate economic activity by cutting Australia's cash rate by 25 basis points in both June and August, leaving it at 1%.

Financial markets share a similar view, putting the probability of 50 basis points worth of rate cuts from the RBA by November at over 100%.

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