The Australian economy appears to be strengthening, with its annual pace of contraction forecast in April not as severe as in previous months, a survey says.

The Westpac/Melbourne Institute leading index of economic activity rose by 0.7 per cent in April and was down 3.5 per cent over the year, according to the survey released on Wednesday.

The annualised result follows readings of minus 5.1 per cent in March and minus 6.1 per cent in February.

But the index, which indicates the likely rate of economic activity three to nine months into the future, remains below the long-term trend growth rate of three per cent.

Westpac chief economist Bill Evans said the growth rate was a “significant improvement” since February, when the index hit its low point in the current cycle, yet there was more pain for the economy in the months ahead.

“The February read was the lowest since 1982,” Mr Evans said.

“Its current pace is still consistent with the Australian economy contracting in the June and September quarters, but if this rate of improvement in the growth rate continues we can look to positive growth in the first half of 2010.

“That profile is broadly consistent with Westpac’s own forecasts with the economy contracting by 0.6 per cent in the June quarter and contracting at an annualised pace of around 1.5 per cent in the second half of 2009 before recovering to a growth pace of one per cent in 2010.”

Mr Evans said three of the four monthly components in the leading index had contributed to its increase in April.

“The All Ordinaries index rose by 5.6 per cent, dwelling approvals were up 5.1 per cent, and the real money supply rose 0.8 per cent.

“US industrial production continued to decline, falling by 0.5 per cent although the rate of decline is moderating.”

Despite the Reserve Bank of Australia (RBA) indicating there was no pressing need to act on its easing bias with monetary policy in its June board minutes released on Tuesday, Mr Evans said there were more rate cuts to come from the central bank.

“We have recently seen a run of data, including today’s leading index, to suggest that the economy, while likely to contract in the near term, can be expected to be entering a period of modest growth from the end of the year,” he said.

“However rising unemployment, higher fixed interest rates, and likely economic disappointment offshore will continue to make the case for more rate cuts in Australia.”

AAP