Outlook for economic activity slightly more upbeat

Prospects for Australia’s growth are looking slightly more optimistic, although a top economist warns of weaknesses.

The economic outlook took on a brighter hue in June, according to several domestic and international data points tracked by Westpac and Melbourne Institute, but is still pointing to below-trend economic growth.

The six-month annualised growth rate applied to the index improved over the month but remained in negative territory for the 11th month in a row.

Westpac chief economist Bill Evans welcomed the improvement in the index but said it had not thrown off the bank’s forecasts for weak growth.

The bank’s economists expect insipid 0.3 per cent growth over the year to June, which includes a contraction in consumer spending of 0.2 per cent.

These predictions rely on another 0.5 percentage points of interest rate hikes, with the bank tipping another hike when the Reserve Bank board meets in August.

Mr Evans said the improvement in the leading index, which lifted to 97.17 in June from 97.06 in May, was less convincing when looking under the hood.

“The improvement over the last six months is mostly coming from reduced drags rather than outright positives,” he said.

US industrial production and dwelling approvals, for example, were both likely to be stabilising after a long period of weakness.

Market expectations of a lower RBA cash rate also contributed to the better score.

Despite these expectations, Mr Evans said Westpac was anticipating another 0.25 percentage point hike in August.

Other economists, including ANZ, expect the central bank to stay on hold at 4.1 per cent.

The RBA will consider key datasets ahead of the August decision, including labour force data on Thursday and the quarterly consumer price index next week.

“By the August meeting, we expect that the board will be dealing with an inflation read still above six per cent; an unemployment rate registering nearly one percentage point below the board’s current estimate of full employment; and the recent report from the national accounts showing unit labour costs growing at 7.9 per cent over the year,” Mr Evans said.

“The data flow, particularly the June quarter inflation report, will be important inputs into the decision in August.”


Poppy Johnston
(Australian Associated Press)


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