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. Westpac views this variable as 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 back from a revised January figure of -0.37% to -0.56% in February. These figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum. 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 around 2.20% in mid-2019.
Westpac chief economist Bill Evans said, “This is a strengthening signal that growth through the first two to three quarters of 2019 is likely to be below trend.” He expects the RBA to ratchet back its 2019 GDP growth forecasts at its May and August meetings and consequently cut the cash rate by 25bps in August and November.