Australian Leading Index's Annual Growth Slows to 2.1% in May

By Jacob Greber

July 16 (Bloomberg) -- Annual growth of an Australian index of leading indicators slowed in May, adding to signs borrowing costs at a 12-year high and surging gasoline prices are cooling the nation's 17-year economic expansion.

The annualized growth rate of the leading economic index slowed to 2.1 percent from 2.6 percent in April, Westpac Banking Corp. and the Melbourne Institute said in Sydney today. The leading index was little changed at 255.6 in May.

Today's report underlines central bank Governor Glenn Steven's view that four interest rate increases since August last year are restraining the economy and will slow inflation. Households and companies have pared back spending amid record gasoline costs and tumbling stock markets.

``Spending growth in the Australian economy will slow substantially through 2008 and 2009,'' said Bill Evans, chief economist at Westpac in Sydney.

Westpac's leading index tracks eight gauges of economic activity, such as company profits and productivity, to give an indication of how the economy will perform over the next three to nine months.

The Reserve Bank's current policy settings are ``exerting the appropriate degree of restraint,'' members of the bank's board said in minutes of their July 1 meeting, released in Sydney yesterday.

Stevens raised the benchmark rate to 7.25 percent in March, the fourth increase in seven months, to cool the fastest inflation in almost 17 years.

Rate Relief

Today's report ``is broadly consistent with the Reserve Bank of Australia's own forecasts and indicates that it will not need to further raise interest rates in this cycle,'' Westpac's Evans said.

Over the past six months, the growth rate of the leading index has dropped to 2.1 percent from 6.5 percent, Evans said today. ``That's the sharpest six-month fall in the growth rate since February 2001,'' when the government introduced a consumption tax, known as the goods and services tax.

Westpac's coincident index, a measure of the current state of the economy, rose 0.2 percent in May. The annual growth rate of the coincident index slowed to 3 percent from 3.2 percent.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net