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.
Since October, the Leading Index has returned values which implied above-trend growth in the near future. In December, the indicator moved further into positive territory as it went from a revised +0.66% to +1.41%. These figures represent a growth over and above trend annual growth, which is generally estimated to be around 2.75% for Australia.
Westpac chief economist Bill Evans thought the December figures to be indicative of a higher rate of economic growth in Australia over the coming months. “This is a very strong above trend reading and, following the solid results in October and November, points to solid above trend growth in the early part of 2018.” In his view sub-indices underlying the Leading Indicator point to “a healthy mix of both international and domestic factors”.
Unfortunately, he has his doubts and he does not think it will last. “However, in our view there are still key negatives around housing, household incomes and the consumer which are likely to challenge the sustainability of any upswing in 2018.” Given these qualifications the Westpac economist does not expect changes in Australia official rate anytime in 2018 or 2019.