Rates to rise despite economic jitters: Economy roundup

More signs that the Australian economy is slowing have emerged today, but the big question remains unanswered – will it be enough to keep the lid on interest rates?

According to today’s Westpac-Melbourne Institute Leading Index of economic activity, the economy is set for a significant slowdown over the next three to six months. The index fell to 3.3% in March, its lowest level in more than four years.

The Leading Index continues to point to an abrupt slowdown in economic activity. After peaking near decade highs at 6.9% in November last year, the growth rate in the index has more than halved, falling well below trend. In fact the index is now further below trend than at any other time in nearly five years, Westpac senior economist Matthew Hassan says.

Other economic indicators released today are less clear cut, however. The Department of Employment and Workplace Relations’ Skilled Vacancies index declined by 0.1% in May, suggesting tight employment conditions continue.

And the infrastructure boom continues to support the construction sector, with Australian Bureau of Statistics data showing the value of new construction work increased by 2.3% seasonally adjusted to $29.9 billion in the March 2008 quarter.

Most people agree the slowdown is coming, but the ANZ bank, for one, doesn’t think enough slowing will happen quick enough to avoid a rates rise – it is now predicting there will be not one, but two rate rises in 2008, with the next rise to come in August.

And, for exporters, those rate rises will come with a rather unpleasant side-effect; a very strong Australian dollar that hits parity with the US greenback by the end of the year.

On the markets today, at 12.20pm the S&P/ASX200 is down 0.7% on yesterday’s close to 5683.4, while the Australian dollar is trading at US95.96c.