Summary: Leading index improves substantially in August; Westpac forecasts “solid” September quarter; index reading implies annual GDP growth to rise to around +0.25% later this year/early next year; index expected to become positive in September as March/April effects drop out of calculation; RBA forecast implies 1.3% growth in second half of 2020.
Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth over the next three to six months. After reaching a peak in early 2018, the index trended lower through 2018, 2019 and the early months of 2020 before plunging to recessionary levels in the second quarter. Readings from the third quarter have been markedly higher.
The latest reading of the six month annualised growth rate of the indicator increased substantially, from July’s revised figure of –4.42% to -2.56% in August.
“These signals are broadly consistent with Westpac’s view that growth in the September quarter will be a solid 1.8% despite an expected 4% contraction in Victoria, which accounts for around 25% of national economic activity,” said Westpac chief economist Bill Evans.
Index figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum. The index is said to lead GDP by three to six months, so theoretically the current reading represents an annualised GDP growth rate of around 0.25% in the last quarter of 2020 and/or the first quarter of 2021.
Commonwealth Government bond yields remained stable except at the ultra-long end, largely in line with US movements overnight. By the end of the day, 3-year and 10-year ACGB yields both remained unchanged at 0.27% and 0.92% respectively while the 20-year yield finished 1bp higher at 1.50%.
In the cash futures market, expectations of a lower actual cash rate, currently at 0.13%, firmed in a technical sense. By the end of the day, contracts implied the cash rate would trade in a range of 0.090% to 0.105% through to the end of 2021.