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Australia's Leading Index Improves; Growth Still Below-Trend


A leading indicator of Australia's economic activity continued to rise in July, but its rate of increase remained below its long-term trend suggesting that the economy is unlikely to exceed trend over the next months.

A survey by Westpac and the Melbourne Institute showed Wednesday that the annualised growth rate of the leading index, which indicates the likely pace of economic activity three to nine months into the future, was 2.2 percent in July, below its long term trend of 2.7 percent.

At the same time, the annualised growth rate of the coincident index, which gives a pulse of current activity, was 2.8 percent. This was also below its long term trend of 3 percent.

"This outcome does not encourage too much optimism that growth in the Australian economy is likely to exceed trend over the second half of 2012 and into 2013," Westpac Chief Economist Bill Evans said.

Westpac forecast the Australian economy to expand at an annualised pace of 2.5 percent over the second half of 2012. Evans said a more robust growth outcome for 2013 will require further interest rate relief, particularly given global fragilities and the strength of the Australian dollar at a time of weakening global commodity prices.

The level of the leading index increased to 284 in July from 283 in June. Three of the four monthly components of the index, namely, the share market, real money supply and US industrial production, increased. Meanwhile, dwelling approvals declined.

Evans noted that the minutes from the Reserve Bank of Australia's September Policy Board meeting indicates the policymakers are very close to deciding to cut rates. The Board next meets on October 2.

At the September meeting, the RBA kept its benchmark cash rate unchanged at 3.5 percent for a third consecutive month. It reduced the cash rate by 50 basis points in May and by a quarter-point in June, following two back-to-back rate cuts towards the end of 2011.

The economy expanded 0.6 percent on quarter in the second quarter following 1.4 percent expansion in the first quarter.

by RTTNews Staff Writer

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