Australia leading index points to strong recovery

SYDNEY, Nov 18 - Australia's economy is heading for a strong recovery, if a leading index of activity proves prescient, supporting the case for more increases in interest rates.

The annualised growth rate of the Westpac Bank-Melbourne Institute leading index of economic activity surged to 5.8 percent in September, up from 3.78 percent in August and a low of -5.4 percent in May.

"That is the fastest turnaround in the growth rate of the leading index since the economy bounced out of recession in the mid 1970s," said Westpac chief economist Bill Evans in a statement on Wednesday.

He expected Australian economic growth to accelerate to a brisk 4.0 percent in 2010, up from an expected 1.9 percent this year.

That was one reason Evans felt the Reserve Bank of Australia would chose to raise interest rates in December, the first time it would have tightened for three months in a row. "Our view is that the data flow since the last board meeting has been sufficiently strong to indicate that another 25 basis point hike is likely," said Evans.

The central bank lifted its cash rate by 25 basis points in both October and November, taking it to 3.5 percent.

The level of the leading index rose 2.2 points to 255.1 in September.

Three of the four monthly components of the leading index increased. The all ordinaries share index, dwelling approvals and the U.S. industrial production index were up, while real money supply eased slightly.