Strong economy may herald rate rise

The strong economic performance of recent months, and the potential for inflation and interest rate problems coming over the horizon, are underlined in the latest set of leading indicators for the Australian economy. The Westpac-Melbourne Institute leading index for April, which points to likely conditions 3 to 9 months ahead, is up 6.7 per cent on a year ago. This reflects the strong March quarter GDP and suggests further growth in productivity and company profits. So we can expect an economy that is already growing at annualised rate over 4 per cent to continue in a similar vein, with no great relief from the skilled labour shortages and infrastructure constraints already experienced. Even the one poor performing sector of late, the rural sector, looks like turning around in the coming six months or so following the recent rains in south eastern Australia. Instead of the 0.5 to 0.75 percentage points drag on economic growth, the drought-ravaged farm sector should start to make a positive contribution to GDP. While there is no great imminent threat of a rise in interest rates, as the second half of 2007 wears on, we may see inflation pressures starting to build again and the chances of at least one 0.25 per cent rate rise occurring late this year or early in 2008.