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Economy set for more below-trend growth

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A combination of soft commodity prices and weakr US growth is likely to weigh on the Australian economy for the rest of 2016.

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That’s the forecast suggested by the Westpac-Melbourne Institute leading index, which rose in April but continues to point to below-trend growth in the second half of this year.

Westpac chief economist Bill Evans noted the index has been in negative territory for the past 12 months.

“International factors have generally been the source of the underperformance,” he said.

“But, in recent months, a deterioration in components associated with the labour market has contributed to further weakness.”

He said that with trend growth generally assessed as 2.75 per cent, the index is sending a more negative signal than both Westpac and official forecasts.

While the Reserve Bank expects three per cent growth both this year and in 2017, the government is more cautious, forecasting 2.5 per cent year average growth in both the 2015/16 and 2016/17 financial years.

Evans said the recent sharp deterioration in the Leading Index survey’s growth rate points to a more serious below-trend growth performance in 2016/17 than indicated even by the government.

Westpac tips that the Reserve Bank will soon cut interest rates to a new record-low to tackle weak inflation.

“We expect that further action will be required at the August meeting once more information about the inflation outlook is available following the release of the June quarter inflation report,” he said.

AAP

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