For the last ten months, Westpac-Melbourne Institute’s Leading Index (which indicates the likely pace of economic activity relative to trend) has returned a result above zero. This implies above-trend growth for the Australian economy. While the index dropped from a revised 1.01% in April to 0.62% in May, any number above zero implies Australia’s GDP growth in the next three to nine months will be higher than trend.
Trend growth was once taken to mean around 3% but recently the RBA and private sector economists have been suggesting it may mean 2.75%.
According to Westpac senior economist Matthew Hassan, commodity prices and the yield spread were behind the deterioration, although US industrial production provided some offset over the same period. Commodity prices had risen early in the last half of 2016 but then they fell between February and May, while the yield curve had flattened, a sign markets expect less growth and/or inflation.