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.
The six-month annualised growth rate of the indicator fell back from a revised November figure of +0.42% to -0.27% in December. These figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum for Australia. 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 2.50% in March and/or June quarters.
A month ago, Westpac chief economist Bill Evans said the Index growth rate pointed to “slowing momentum into the new year” despite a bounce in the index. After this latest report, he has continued to hold this view. “However, despite these choppy results, the major trend is consistent with our view that growth has slowed from a solid above-trend pace to at- or below-trend going forward.”