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 three months, the Leading Index has returned values which imply below-trend growth. August’s reading returned -0.19% which is a modest decline from July’s revised reading of -0.04% (revised up from -0.10%).
According to Westpac chief economist Bill Evans, a deterioration in conditions since March has been driven in the main by two factors. Commodity prices have fallen, which means Australian exporters are likely to earn less income as shipments and payments are made on contracts in the period.
The other driving force was a change in the gradient of the yield curve, which is represented in this case by the spread between BBSW and the 10 year bond rate. The gradient of the yield curve is said to be a simple but reliable predictor of future economic activity and recently this spread has been contracting and getting closer to zero.