Aust Economy On Track For Sharp Slowdown

Source : The Business Times, August 20, 2008

SYDNEY - Australia's economy is on track to slow sharply in the next three to nine months, burdened by tight financial conditions and evaporating household wealth, a private index released on Wednesday suggested.

The annualised growth rate of the Westpac Institutional Bank-Melbourne Institute leading index of economic activity slowed to 2.0 per cent in June, from 2.4 per cent in May and 4.0 percent at the start of the year.

The June pace was the slowest since July 2001 and well below the long term trend of 3.9 percent.

Westpac's chief economist, Bill Evans, said the slowdown was mainly due to sharp falls in the local share market, tighter financial conditions, weak dwelling approvals and soft data for US industrial production.

Mr Evans said the slowdown only added to the case for the Reserve Bank of Australia (RBA) to cut its 7.25 per cent cash rate at its next policy meeting on Sept 2.

Indeed, Mr Evans argued that a hefty cut of 50 basis points was needed, rather than the 25 basis points widely expected.

'Our view is that the first move in an easing cycle should be larger than the average once the case has been made to move,' said Mr Evans.

'With rates well into the contractionary zone and global liquidity conditions deteriorating there is a strong case for a larger first cut.' The level of the leading index rose 0.3 points in June to 256.3, while the coincident index also firmed by 0.3 points to 243.1. Annualised growth in the coincident index, which tries to take the pulse of the economy right now, slowed to 2.4 per cent, from 2.7 per cent in May. -- REUTERS