This indicator for Australia's economic outlook just went into full reverse

Eamonn McCormack/WireImage

After indicating that Australia’s economy looked set to go on a tear, the latest reading of the Westpac-Melbourne Institute leading index showed a sharp pullback in January.

The index showed a reading of +0.73% — almost a full reversal from +1.39% in December.

The index indicates the likely pace of economic activity over the next three to nine months, relative to trends.

So the latest data suggests that economic growth is set to climb by around 0.73% more than the RBA’s June 2018 estimate of 2.75%.

Despite the bumper January result, Westpac’s chief economist Bill Evans added a degree of caution about the 2018 outlook — with the increase in the January data driven by the huge spike in building approvals at the end of last year.

“After contributing 0.33ppts to growth in December, approvals fell sharply in January to subtract 0.21ppts points from growth,” Evans said.

The index “remains below the high levels seen over the six months to May last year when the average growth rate reading was a solid +1.15%”.

However, although the index has been subject to some volatility, Evans noted that January’s reading of +0.73% is a considerable increase from -0.12% in August last year.

Since that time, the biggest driver of growth in the index has been rising commodity prices, which have risen by +0.88%.

Gains in the ASX200 and a steady rise in consumer sentiment at the end of last year have also brightened the outlook.

But Evans is maintaining his cautious stance on the Australian economy’s growth prospects in 2018.

“In our view, there are still key negatives around housing, household incomes and the consumer that are likely to challenge the sustainability of any upswing in 2018,” Evans said.

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