Dark clouds forecast for economic growth

The economy is tracking towards a slower pace of growth next year and possibly a patch of stagnation in the back half of 2023.

The Westpac-Melbourne Institute leading index – which indicates the likely pace of economic activity three to nine months into the future – has recorded the fourth consecutive month with a negative growth rate.

The index, which collates several forward-looking domestic and international data points to indicate future growth, has seen a sharp turnaround in six months – from 0.66 per cent above trend in May to 0.92 per cent below trend in November.

In October, the index recorded a -0.84 per cent result.

The index reflected the aggressive policy tightening under way around the world and the subsequent dampening in economic activity, with the yield spread and commodity prices pulling the indicator down.

Other inputs into the index have done little to move the indicator either way during the past six months.

Westpac chief economist Bill Evans said the November leading index print was consistent with the bank’s growth forecast for the economy of one per cent over 2023, with growth grinding to a halt in the second half of the year.

“The accumulated impact of the Reserve Bank’s tightening cycle, which began in May this year and is expected to extend out to May 2023, will be the main source of the economic headwinds, although persistent declines in real wages; an ongoing deterioration in the residential housing market; uncertain asset markets; and a difficult year for the global economy will all play their parts,” Mr Evans said.

The index pointed to heavy-lifting done by household spending in the September quarter GDP read of 0.6 per cent growth and how vulnerable consumption growth is to worsening economic conditions.

“Given the interest rate increases and the household saving ratio now being around its pre-pandemic levels, a further slowing in consumption growth, as foreshadowed by weak consumer sentiment, appears likely,” the index said.

The RBA’s growth predictions are more optimistic, with the central bank expecting GDP to hit a floor of about 1.5 per cent by late 2023 and the first half of 2024.

Westpac economists are predicting another three interest rate rises in the new year to stamp out persistent wages and inflation challenges.

 

Poppy Johnston
(Australian Associated Press)

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