Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of economic activity relative to trend in Australia. The index combines certain economic variables which are thought to lead changes in economic growth into a single variable. This variable is claimed to be a reliable cyclical indicator for the Australian economy and an indicator of swings in Australia’s overall economic activity.
Since October, the Leading Index has returned values which implied above-trend growth in the near future. However, in January the six month annualised growth rate of the indicator fell back from a revised +1.39% to +0.73%. These figures represent growth rates above trend GDP growth, which is generally thought to be around 2.75% per annum for Australia.
Westpac chief economist Bill Evans was not overly-concerned by the Index’s retreat. “This is a full reversal of the strong 0.7% jump we saw last month…Nevertheless the Index is still registering a comfortably above-trend reading and, following the solid results in October and November, points to above-trend growth in the early part of 2018.”