Australia heads for recession, Westpac leading index shows

Wednesday 15th April 2009

Australia's economy may lurch into a deeper-than-expected recession in 2009 as a leading index of economic activity records its weakest reading in about 27 years.

The Westpac Banking Corp-Melbourne Institute index fell 0.3% to 248.6 points in February, from 249.4 in January, according to a statement from Westpac today. That amounts to an annualized rate of -5.1% in February, the lowest since September 1982, from -4.8% in the previous month.

"Westpac is currently forecasting that the Australian economy will contract by 1% in 2009, which we expect to be the low point of the cycle," said chief economist Bill Evans. "The current rapid deterioration in the growth rate of the leading index points to downside risk for that forecast," he said.

The Reserve Bank of Australia has slashed its key interest rate by 425 basis points since September to a record low 3% to help underpin an economy that contracted 0.5% in the fourth quarter amid weakening global demand for raw materials.

Westpac's coincident index, which measures the current state of the economy, fell 1.1 points to 240 points in February, for an annualized growth rate of 0.7%. That compares with its long-term trend of 3.4%.

Evans predicts the RBA's key rate will bottom at about 2% this year. "The economic case for cutting rates is undeniable," he said.

Still, the central bank may not move when it next meets on May 5 as it will want to keep some cutting ability up its sleeve in the second half, he said.

Australian three-month bank bills climbed five basis points to 3.19% while the yield on 10-year government bonds eased 1 basis point to 4.81%. The Australian dollar fell to 71.80 US cents from 72.22 cents before the Westpac report was released.

By Jonathan Underhill

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