Economic growth set to remain above-trend

Australian economic growth is expected to remain comfortably above its long-term average through the remainder of this year and in 2022, but the expansion won’t be as stellar as the recovery seen so far from last year’s recession.

That’s the implication of the latest Westpac-Melbourne Institute leading index – a pointer to the likely pace of economic activity three to nine to months into the future – which eased further in May.

“The growth rate in the leading index has normalised significantly over the last six months to signal a more sustainable above-trend growth rate through the remainder of 2021 and 2022,” Westpac chief economist Bill Evans said.

Mr Evans expects annualised growth of 4.5 per cent over the second half of 2021, while growth in 2022 is forecast at a “more normal but still healthy 3.2 per cent”.

That compares with a long-term growth trend rate of around 2.8 per cent.

The economy posted two quarters of growth above three per cent for the first time on record in the second half 2020, followed by a still strong 1.8 per cent in the first three months  

Economists expect consumer spending will be a key plank of Australia’s continued economic expansion, aided by the wealth effect of rising house prices, a strong labour market, and a surge in household savings.

Even so, consumer confidence – a pointer to future household spending – has yet to fully get over Melbourne’s most recent COVID-19 lockdown.

The weekly ANZ-Roy Morgan consumer confidence index rose just 0.3 per cent, coming off a three per cent national drop in the preceding two weeks as a result of Melbourne 14-day lockdown.

ANZ head of Australian economics David Plank points out some restrictions remain in Melbourne, such as mandatory wearing of masks in public places and a raft of travel and gathering limitations.

“This probably explains why confidence in Melbourne fell a further 0.9 per cent, while it rose by 4.8 per cent in regional Victoria,” Mr Plank said.

“We see the rapid recovery in confidence in regional Victoria as evidence that consumer sentiment remains resilient in the face of temporary lockdowns.”

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