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 from a revised +0.83% in April to +0.11% in May. These figures represent growth 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 a little under 3% in the September or December quarters.
Since October, the Leading Index has returned values which implied above-trend growth in the near future. The series “yo-yoed” to some degree in the first quarter of 2018 but, since then, it has slid back to just above zero, the point which represents “at trend” growth.