STRONG ECONOMY PRESSURES RATES

May 23 , 2007 11:53am
Article from: AAP

• Inflation pressures to mount
• Economy is growing above trend rates
• A rate rise in 2008 is forecast

THE pace of economic activity in Australia has picked up in March, with interest rates likely to rise next year, says Westpac.

The Westpac-Melbourne Institute leading index of economic activity, which indicates the likely pace of activity three to nine months in the future, was 4.4 per cent, and above its long-term trend of 4 per cent.

The annualised growth rate of the coincident index was 5.7 per cent, which was well above its long-term trend of 3.6 per cent.

Economy to gain strength

Westpac senior economist Andrew Hanlan said the outcome pointed to a positive economic outlook.

"We saw the Australian economy gather momentum late in 2006 and into early 2007," he said.

"Non-farm GDP strengthened in the December quarter and year-ended growth was a healthy 3.5 per cent.

"A significant lift in consumer spending also suggests the economy has accelerated."

Mr Hanlan said real retail sales over the last two quarters were up 6 per cent annualised, the strongest pace since the housing boom of 2003-04.

"In our view the Leading Index suggests that this new found momentum in the Australian economy is likely to be sustained throughout 2007."

Rates set to rise
The international economy continues to provide a significant stimulus to our economy, Mr Hanlan said.

"The risk is that inflation pressures re-emerge with the labour market to tighten further and the housing sector to move into recovery mode," he said.

Mr Hanlan said the inflationary pressures would most likely lead to an interest-rate rise in Australia in the first half of 2008.  The central bank raised interest rates three times in 2006.

Westpac said that although global economic expansion was set to continue, the pace at which many economies grow was likely to slow over the coming months.