Australian leading index collapses, pointing to recession

Wednesday 19th November 2008

Australia's leading index of economic activity tumbled in September, posting a bigger drop in the growth rate than during the 1991 recession and suggesting that nation is heading for another contraction.

The annualised growth rate in the Westpac Institutional Bank-Melbourne Institute leading index of economic activity slowed to 1.1% in September from 3.5% in August, the largest slide since the mid-1980s.

"This is a very disturbing fall in the growth rate of the leading index," Westpac chief economist Bill Evans said in a statement. "It is consistent with Westpac's view that growth in the first half of 2009 will be barely positive, with a decent risk that the first two quarters of growth in 2009 could be negative."

The leading index also supports Westpac's prediction that the Reserve Bank of Australia will slash its target interest rate by 75 basis points to 4.5% in December, its third consecutive monthly cut. The central bank last week lowered its forecast for 2008 economic growth to 1.5% from 2% as the global economic slump erodes demand for the nation's raw materials.

The leading index fell 2.5 points in September to 258.4. The coincident index, which measures current growth, rose 0.1% to 236.0.

Australia's benchmark S&P/ASX 200 Index has tumbled 43% this year amid company failures, profit downgrades and rising costs in a frozen credit market. Business confidence fell to a record low in October.

By Jonathan Underhill

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