Sign of strong economy as confidence lifts

New data points to a strengthening in the Australian economy in the coming months, aided by the significant easing of COVID-19 pandemic restrictions.

The Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity three to nine months into the future, rose to its highest level since May 2021 in March.

The index rose to 1.71 per cent from 1.02 per cent in February, suggesting the economy will grow comfortably above the long-term growth rate of 2.8 per cent.

“It is very welcome to see these encouraging signals from the leading index in the early months of 2022,” Westpac chief economist Bill Evans said.

“They are consistent with Westpac’s upbeat view of the growth momentum in the economy for most of 2022.”

He expects growth in 2022 of around 5.5 per cent, with more than 70 per cent of that growth being concentrated in the June and September quarters, and driven by the rapid recovery in household spending.

Separately, falling petrol prices have given a further lift to consumer confidence, backing the recovery in spending.

The ANZ-Roy Morgan consumer confidence index, also released on Wednesday, rose 2.3 per cent in the past week to 96.8, its highest level since March 6.

However, an index below 100 indicates pessimists still outweigh optimists.

In a mirror image, household inflation expectations dropped by 0.5 percentage points to 5.3 per cent, its lowest level since March 6 as petrol prices declined for a fourth straight week.

“Oil prices have risen more than 10 per cent from the low at the beginning of last week, so it’s not clear if there is much more room for confidence to be boosted by lower petrol prices,” ANZ head of Australian economics David Plank said.

The Australian Institute of Petroleum said the national average for petrol prices fell by a further eight cents in the past week to 166.3 cents a litre, continuing a sharp decline from above $2 a litre.

This reflects in part the federal government’s temporary halving of fuel excise in last month’s budget.

Still, cost of living pressures remain more broadly in the economy with next week’s inflation figures expected to show a sharp rise.

In the minutes of the Reserve Bank of Australia’s April board meeting it warns that rising inflation may have brought forward the timing of an increase in the cash rate.

It expects measures of underlying inflation in the March quarter to be more than three per cent – above its two to three per cent target.

But it indicated it still wants to see the consumer price index for the March quarter due on April 27 and the wage price index for the same period on May 18.

Economists are generally expecting the cash rate to increase by 0.15 per cent to 0.25 per cent at the June board meeting, ending a gradual decline in rates stretching back a decade.

However, there are concerns a very strong inflation result could see the cash rate jump by 0.4 per cent to 0.5 per cent at the May board meeting, even though it would be in the middle of a federal election campaign.

 

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)

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