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The Australian economy is on the road to recovery with a leading economic indicator posting its first positive reading in nearly a year.

The annualised growth rate of the Westpac-Melbourne Institute leading index of economic activity, which indicates the likely pace of activity three to nine months into the future, was 1.7 per cent in August.

It was the first positive reading for the index since September 2008.

The index was minus 1.0 points in July and minus 4.2 points in June.

However, the index remains below its long-term trend of 2.5 per cent, the survey released on Wednesday said.

Westpac chief economist Bill Evans said the recovery in the growth rate of the leading index had been “remarkable”, with the annualised pace increasing 8.6 percentage points between May and August.

“Following the two recessions Australia experienced in the early 1980s and 1990s the rate of recovery in the index was not as steep,” Mr Evans said.

“In the recovery in 1990/91 the growth rate improved by 4.5 percentage points over nine months and in the 1982 recovery the growth rate improved by 6.6 percentage points over six months.”

Mr Evans said the index supported the view that the local economy was stronger than was forecast a few months ago and would be more robust in 2010.

Australia’s gross domestic product (GDP) expanded 0.6 per cent in the year to June 2009.

“It is certainly supportive of Westpac’s forecast that GDP growth in Australia will increase from 1.5 per cent in 2009 to four per cent in 2010,” he said.

Three of the index’s four components were higher in August – share prices, real money supply and US industrial production while dwelling approvals fell by 0.1 per cent.

Mr Evans said the debate for the Reserve Bank of Australia’s (RBA) board at its meeting on November 3 would be to raise the cash rate by 25 or 50 basis points.

The RBA lifted the cash rate by 25 basis points to 3.25 per cent on October 6, its first increase since March 2008.

“The clear signal from today’s print of the Leading Index points to significantly improving growth prospects in 2010 and a need to move rates away from the current highly expansionary setting,” he said.

Recent comments from the central bank have documented the RBA’s concerns about underlying inflation, Mr Evans said.

The RBA board said this week underlying inflation remained above the bank’s two-to-three per cent target range and while expected to fall, the trough in inflation was set to be higher than previously forecast.

“The release of the September quarter inflation data on October 28 may show that the quarterly pace of underlying inflation has actually picked up,” Mr Evans said.

“In those circumstances a decision to raise rates by 50 basis points in November would not surprise.”