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. Westpac views this variable as a reliable cyclical indicator for the Australian economy and an indicator of swings in Australia’s overall economic activity.
The six-month annualised growth rate of the indicator fell back from a revised December figure of -0.29% to -0.43% in January. These figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum. The Index is said to lead GDP by 3 months to 6 months, so theoretically the current reading represents an annualised GDP growth rate of around 2.30% in March and/or June quarters.
The major negative influences on the Index in February came from a fall in the local share market, fewer applications for home construction and lower US industrial production. Higher commodity prices and a fall in unemployment expectations amongst employees provided some offset.
Westpac chief economist Bill Evans noted the difference between the current reading and those from the middle of 2018. “The Index growth rate has shown a significant deterioration over the last six months, declining from +0.17% in August to –0.43% in January.”