Economic growth forecast suffers fifth monthly dip in a row

Westpac’s economic growth forecast has trended downwards for the fifth month in a row, although the overall picture remains positive for small businesses.

The bank’s ‘leading index’ forecast, which predicts the likely pace of economic activity three to nine months into the future, was down to 5.3%.

Despite the drop, the fifth consecutive monthly fall this year, the growth forecast is still ahead of the long-term average of 3.1% and is a significant improvement on the -6% forecast at the height of the economic downturn two years ago.

Westpac said that the index’s forecast is in line with its own average growth forecast of 3.5% in 2010. The bank expects an average economic growth rate of 4% next year.

The 2011 forecast is in line with the Reserve Bank’s predictions, although Westpac has warned that growth will slow in 2012, despite the RBA’s insistence that the trend will remain at 4%.

Westpac said that the economic growth forecast drop from 10.3% to 5.3% over the last five months has been down to a drop in the ordinaries index, a slip in new housing approvals and lower productivity.

Bell Evans, the bank’s chief economist, says that he expects official interest rates to remain on hold until after Christmas, despite the slowing growth.

“The decision by the (RBA) board to hold rates steady in October surprised us,” he says. “Until the release of the September board minutes we had expected rates to remain on hold until February next year. “

“However such was the stridently hawkish tone of those minutes we had little choice but to forecast an immediate rate hike. The tone of the October Board minutes is much more dovish. Recognition is given to the impact of the high Australian dollar to the inflation outlook.”

“A less confident tone is adopted on both business investment and household spending. Overall we assess that despite the ongoing message that at some time rates will be rising they are now likely to be on hold until February.”