Signs good for Australian economy in 2012

Australian economic activity is showing signs of picking up, but is expected to remain below trend for the remainder of 2011.

Growth in the Westpac-Melbourne Institute Leading Index improved to 4.5% in August, above the long-term trend of 3.3%.

The Index figure, a measure of the likely pace of economic activity three to nine months into the future, improved from an upwardly-revised 3.5% in July.

Westpac (ASX:WBC) chief economist Bill Evans said while the upswing indicates that growth could surge above trend in early 2012, due to the current volatility of the index it is too early to tell for sure.

But he added that Westpac is expecting growth momentum to be just 1.5% in the second half of 2011. “That is well below trend growth for the economy,” he said.

Three of the four components used to calculate the monthly Leading Index – the real money supply, dwelling approvals and US industrial production – improved. But the fourth, the All Ordinaries Index, fell 2.9%.

Evans said the bank has also recently documented indications of improvements in retail trade, productivity and particularly corporate profits.

He added that due to global economic conditions, Westpac's previous forecast of underlying inflation of 3.25% for 2012 “may now be revised down to the 2.5% to 2.75% range.

“That will allow ample scope [for the RBA] to ease [cash rate] policy given the clear domestic and global difficulties,” he said.