Aust economy expected to grow above trend

Australian economic activity is expected to grow above trend in the medium term due to a more upbeat outlook on the economy, an index has found.

The annualised growth rate of the the Westpac-Melbourne Institute Leading Index of Economic Activity -- which indicates the likely pace of economic activity six to nine months into the future -- was 4.7 per cent in July, above its long-term trend of 4 per cent.

The annualised growth rate of the coincident index, which provides a more up to date picture of the economy, was 5 per cent in July, above its long-term trend of 4.1 per cent.

Westpac chief economist Bill Evans said economic data supported a better outlook on the Australian economy.

"Following the release of the much stronger than expected National Accounts, which showed GDP grew by 1.3 per cent in the June quarter, the growth rate in the leading index in the year to June was revised up to 4.9 per cent -- an upward revision of two percentage points," Mr Evans said.

He said June and July were the first months since August 2004 that the leading index had grown above trend.

The index suggested economic growth could pick up to long term trend or better by late 2005 and into 2006.

"The June quarter national accounts emphasised that strong business investment, was providing the Australian economy with a solid boost," Mr Evans said.

"The news on consumer spending was not encouraging, registering a third consecutive quarter of sub-trend growth.

"With debt servicing ratios at record highs, house prices likely to remain soft and petrol prices stressing some household budgets a sharp resurgence in consumer spending seems unlikely."

However, the investment boom and associated surge in exports of resources were likely to restore the growth pace of the Australian economy in 2006 to trend levels.

Meanwhile, the coincident index continued to be supported by the strong labour market with total civilian employment rising 0.1 per cent while the unemployment rate was steady.

Mr Evans said the recent run of strong data suggested interest rates were unlikely to change in the next 12 months.

- AAP