Summary: Leading index growth rate rises in September; Westpac: slightly negative for best part of a year; reading implies annual GDP growth of around 2.35%-2.60%; ACGB yields fall; rate-cut expectations firm; Westpac: forecasts 1.5% GDP growth in calendar 2024, 2.4% in calendar 2025.
Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth in the short-term. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings spiked towards the end of 2020 but then trended lower through 2021 and 2022 before flattening out in 2023 and 2024.
September’s reading has now been released and the six month annualised growth rate of the indicator registered -0.15%, up from August’s revised figure of -0.26%. The index reading represents a rate relative to “trend” GDP growth, which is generally thought to be around 2.50% to 2.75% per annum in Australia.
“The Leading Index growth rate has been slightly negative for the best part of a year now,” said Westpac senior economist Matthew Hassan. “That in itself is fairly rare; this is one of the longest periods of ‘middling’ reads in the history of the measure with the more typical pattern one of more-pronounced swings between strong and weak.”
Westpac states the index leads GDP growth by “three to nine months into the future” but the highest correlation between the index and actual GDP figures occurs with a three-month lead. The current reading may therefore be considered to be indicative of an annual GDP growth rate of around 2.35% to 2.60% in the next quarter.
Domestic Treasury bond yields fell moderately across a slightly steeper curve on the day. By the close of business, the 3-year ACGB yield had lost 4bps to 3.72%, the 10-year yield had shed 5bps to 4.21% while the 20-year finished 6bps lower at 4.60%.
Expectations regarding rate cuts in the next twelve months firmed, with a February 2025 rate priced in as an 80% probability. Cash futures contracts implied an average of 4.315% in November, 4.25% in December and 4.175% in February 2025. September 2025 contracts implied 3.67%, 67bps less than the current cash rate.
The RBA’s August Statement on Monetary Policy GD?P growth forecasts are slightly higher than Westpac’s latest numbers, which are 1.5% for calendar 2024 and 2.4% for calendar 2025. The RBA forecasts GDP growth for the years ending December 2024 and December 2025 to be 1.7% and 2.6% respectively.