Westpac reports the annualised growth rate of the Westpac?Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 2.7% in April 2011, which is below the Index's long term trend of 3.1%. The annualised growth rate of the Coincident Index was 0.3%, well below its long term trend of 2.9%. The growth rates in both Indexes have seen significant downward revisions due to the incorporation of March quarter data.

While Westpac economists see no reasons for concern, as weather related disasters continue to impact, they do suggest the case for further RBA tightening is weakening. Westpac doesn't think another rate rise is feasible before November, at the earliest.

The following paragraphs have been quoted directly from today's press release:

The scale of the impact of weather disasters on the economy's ongoing growth momentum is becoming more apparent. After previously running at just over 5%, the six month growth rate in the Index has been marked down to just 2.7%. That is marginally below the long term trend rate, indicating sub-par growth, but not overly weak. Moreover there are signs that the worst of the hit has passed with the growth rate rising from the 2.3% rate recorded for February.

Assessing growth momentum so soon after a large negative shock like the weather events we saw at the start of the year is very difficult. These events have created significant distortions that will take time to drop out of the picture. As this happens we may continue to get conflicting signals. The good news so far is that even with the negative hit, the growth rate in the Leading Index does not appear to be so low as to be of major concern."

The revised estimates show that between December 2010 and April 2011 the growth rate of the Leading Index fell from 4.4% to 2.7%. Most of the slowdown has come from domestic components with company profits contributing ?0.7ppts; productivity ?0.4ppts; dwelling approvals ?0.2ppts and real money supply ?0.2ppts. However, there has also been a drag from US industrial production (?0.5ppts); and commodity prices (?0.4ppts) suggesting the softening is not only due to weather events and other 'homegrown' influences like November's interest rate rise. These negatives were partially offset by positives from overtime worked (+0.7ppts) and share prices (+0.1ppt).

The level of the Leading Index rose by 0.6 points in April, or 0.2%. Amongst the monthly components of the Index, the real money supply rose 0.5% the All Ordinaries Index fell 0.3%, dwelling approvals were down 1.2%, and US industrial production was flat. Downward revisions were due to the inclusion of March quarterly data on company profits (?7.2%) and productivity (?1.9%) with both components reflecting severe weather-related disruptions in the first quarter of 2011. This was partially offset by quarterly rises in overtime worked and commodity prices.

The level of the Coincident Index rose 0.3 points (or 0.1%). Real retail trade rose 0.9% but employment fell 0.3% and the unemployment rate was steady. The Coincident Index was also revised down heavily following the inclusion of March quarter data with industrial activity down 4.9%qtr and non-farm production down 1%qtr. This was partially offset by a 2.5% rise in real household income in the March quarter.

The Reserve Bank Board next meets on July 5. The lowered level of urgency apparent in the statement accompanying the Board's June decision to leave rates unchanged and in the minutes released yesterday makes a July move extremely unlikely. The RBA retains a tightening bias but does not yet see a clear case for a move now. With today's Leading Index highlighting both the softness of growth momentum in the first half and the difficulties in judging momentum due to one-off weather effects, it's not surprising the Bank has chosen to stay in "watch and wait" mode.

Beyond the July meeting the critical data releases will be on the labour market (July 7) and inflation (July 27). We doubt these will provide a sufficient case for an August move. Instead, more convincing evidence of a post-flood rebound and some "settling down" in the consumer and housing sectors will likely be required. As such we do not see any window for the Reserve Bank to deliver on its stated intention to raise rates until November at the earliest.

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