Australia’s growth prospects still looking downcast

Australia’s growth outlook remains subdued as turmoil in the global banking system adds to the pressures already weighing on advanced economies.

The Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity relative to trend over the next three to nine months, recorded a modest gain to -0.94 per cent in February from -1.04 per cent in January.

Despite the uptick, the growth rate has been in negative territory for seven months in a row, which points to below-trend growth in the coming months.

Westpac chief economist Bill Evans said the slowdown reflects the lagged effect of the sharp rise in interest rates, the dramatic fall in real wages, a bottoming-out of the savings rate, falling house prices, and now, to a lesser extent, volatility in the global banking system.

‚ÄúRecent developments in the global banking system are unlikely to significantly impact Australia‚Äôs financial system but will be a further headwind for the major advanced economies, particularly through a reduction in credit availability and knock to confidence,‚ÄĚ Mr Evans said.

‚ÄúThis, in turn, will have indirect implications for Australia‚Äôs growth prospects.‚ÄĚ

The slowdown in hours worked, falling commodity prices, a slowdown in US industrial production and softening expectations for unemployment drove the deterioration in the index over the month.

Mr Evans said these falls were slightly offset by improved consumer sentiment and a lift in equity markets, but these gains would likely be short-lived given the recent volatility in global financial markets.

This includes the collapse of regional banks in the US and troubles facing the Swiss bank Credit Suisse.

He said the leading indicator index aligned with Westpac’s expectations for one per cent growth in the Australian economy over 2023 and 1.5 per cent in 2024.

On Friday, Westpac updated its cash rate prediction for a pause in April and a final 0.25 percentage point hike in May.

‚ÄúNew information will be available for the May board meeting, particularly around inflation and the staff‚Äôs revised economic forecasts,‚ÄĚ Mr Evans said, which would likely indicate the need for another hike.

 

Poppy Johnston
(Australian Associated Press)

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