Leading index reveals commodity price burden is easing, says Westpac

Westpac survey finds that sentiment improved in May as commodity prices weighed less heavily on the economy.

The Westpac-Melbourne Institute leading index showed that the expected six-month annualised growth rate had improved from 1.19 per cent below trend in April to minus 0.42 per cent in May — the best reading since October. AFP PHOTO/WILLIAM WEST.

While the Australian economy still appears set for more sub-trend growth, a survey has found that sentiment improved in May as the commodity price burden began to ease.

The monthly Westpac-Melbourne Institute leading index showed that the expected six-month annualised growth rate, which assesses likely growth against the long-term trend, had improved from 1.19 per cent below trend in April to minus 0.42 per cent in May — the best reading since October.

The index had bottomed in March at -1.53 per cent — its weakest print in five years — but has improved in ensuing months as commodity prices regained their footing.

The May survey found commodity prices were now having a having a neutral effect on the index, after weighing heavily for the past two years.

“This is an important development,” Westpac senior economist Matthew Hassan said.

“While commodity prices are likely to remain weak near term, 2016 is expected to see an end to the strong underlying downtrend in prices that has dominated since 2011.”

Mr Hassan said the reduced pressure on incomes was, in turn, expected to see a gradual improvement in conditions over the course of the year.

“The May leading index update may be the first sign that this shift is coming through,” he said.

Out of the index’s eight components, five increased in May and three declined.

The Reserve Bank-Australian dollar commodity price index rose 3.8 per cent; dwelling approvals lifted 3 per cent and the ASX200 2.4 per cent. The main negative was from a 1.7 per cent fall in total hours worked and a 0.4 per cent decline in US industrial production.

Mr Hassan said with the next inflation report out late next month, the Reserve Bank board was likely to hold rates on July 5 but said Westpac expected the June quarter inflation read to reconfirm inflation was unlikely to return to the bank’s 2-3 per cent target over the forecast horizon — “and that another 25 basis-point cut is necessary with that cut being delivered at the board’s meeting on August 2”.