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This key indicator points to a gloomy outlook for Australian economic growth

Photo: Getty Images

The Westpac-MI leading index, a gauge on likely economic activity in three to nine months ahead, weakened modestly in November, pointing to the likelihood that the economy will grow below trend in the first half of next year.

The index fell to -0.21% from -0.13% in October. It signals that economic activity in the coming months is likely weak to moderate, according to Westpac, not that growth itself will contract.

The leading index comprises eight individual components. Their contribution to the final monthly reading can be found in the table below, supplied by Westpac.

Bill Evans, Westpac’s chief economist, described the result as a “little disappointing”, particularly as the deterioration followed two months of improvement.

“In the two previous months we had seen some modest improvement in the growth rate, raising hopes that growth in the Leading Index might exceed trend by year’s end. Unfortunately, the set-back in this result leads us to the more general conclusion that growth in the Leading Index remains stuck below trend,” said Evans following the report’s release.

“The growth rate has now been below trend for the last five months. That is indicating that growth in the Australian economy in the first half of 2016 will be below trend.”

Wespac currently forecast that economic growth during the first half will be around 2.75%, now widely regarded as Australia’s new trend growth rate.

In the wake of the disappointing leading index result for November, Evans suggests that their current forecast “may be somewhat optimistic”.

Despite the weakness, Evans retains his view that the RBA will leave interest rates unchanged throughout 2016 and 2017, although he suggests that “risks to the view are to the downside”.

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