Leading index shows economic slump following typical pattern
By Garry Shilson-Josling, AAP Economist15 Apr 2009 5:52 PM
SYDNEY, April 15 AAP - The Westpac - Melbourne Institute leading index shows the economy is being assaulted by the usual suspects.
The index is an amalgam of key indicators that have been a reliable pointer to the direction of the economy about six months in advance.
Figures released on Wednesday showed the index was declining in February at its fastest pace since September 1982.
That, in turn, implies that gross domestic product (GDP) in the second half of this year will probably be contracting as its steepest rate since late 1982 and early 1983, a period which itself recorded the fastest trend rate of decline in the 50-year history of the national accounts.
The index is made up of eight components.
On the financial side, there are the share market, money supply, and corporate profits.
In the real economy there are dwelling construction approvals, amount of overtime worked and labour productivity.
And there is a measure of inflation, manufacturing materials prices, and a gauge of the health of the world economy in the US index of industrial production.
The economists at the Melbourne Institute apply smoothing techniques to the data, so it is not just the latest change in each of its components that affect the index.
Even so, the figures do confirm that the fundamental things still apply to this recession, despite its genesis in an event as rare as the global financial crisis.
Historically, the Australian economy has been hostage to business cycles in the rest of the world, with the US calling the shots.
Part of that dependence has been through industrial production, which in the US has slumped by 11 per cent over the past year.
But the dependence has also been partly through the links between share markets in the US and Australia.
>From its late 2007 peak, the US share market is down by 46 per cent despite an encouraging rally from an early March low.
Australia's share market has followed suit - it is also 46 per cent below its peak.
The local housing sector has also been implicated in past recessions and has been right at the centre of things, again.
The low point in dwelling approvals in January was below the troughs of the early 1980s and early 1990s recessions, even before adjusting for the higher population nowadays.
The slower growth of economic output, as measured by GDP, feeds through into the labour market, initially through reductions in overtime worked, an indicator of more general weakness in employment.
The quarterly Commonwealth Bank/ACCI survey of industrial trends shows overtime usage by the end of last year had fallen to its lowest level in the survey's 14-year history.
And the commodity price cycle is turning down.
In the December quarter the price index of manufacturing inputs posted its biggest fall in 22 years.
These factors are all embodied, one way or another, in the leading index.
So while the cause of the current slump, the financial crisis, is unique, its mechanics are not out of the ordinary.
