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 measure which is claimed to be a reliable cyclical indicator for the Australian economy and a “critical” indicator of swings in Australia’s overall economic activity.
For the last couple of months, the Leading Index has returned values which imply below-trend growth. July’s reading returned -0.10% and while it was a negative result it was an improvement over June’s revised reading of -0.54% (revised up from -0.76%).
Westpac chief economist Bill Evans contrasted recent readings with those at the start of the year. “Despite the improvement in the growth rate it remains negative for a second consecutive month pointing to below-trend growth momentum and a sharp turnaround from strong positive, above trend reads at the start of the year.” He thinks the Index suggests a 2018 growth rate which was more consistent with Westpac’s forecast than the RBA’s recent forecast of 3.25% growth contained in its August Statement on Monetary Policy. “Westpac is currently forecasting growth of 2.50% in 2018. Trend growth is generally assessed as 2.75%.”