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. After a sharp drop in January, the six month annualised growth rate of the indicator bounced back almost completely from a revised +0.68% to +1.30%. These figures represent growth rates above trend GDP growth, which is generally thought to be around 2.75% per annum for Australia.
Westpac chief economist Bill Evans said international influences had a “disproportionate impact” on this latest reading. Higher commodity prices and increased U.S. industrial production accounted for 90% of the 130 basis points above trend, something the Westpac economist thought as disappointing since they are external to Australia.
Perhaps another way to look at the major influences on the model’s reading is to celebrate the depth of Australia’s integration in the global market. A less optimistic approach is acknowledging how little say Australia has in its economic destiny.