Summary: Leading index falls in May; at level signalling “more sustainable above trend growth rate” through 2021 and 2022; reading implies annual GDP growth to rise to around 4.25% during third, fourth quarters; FY 2021 GDP growth expected to be at/above 9.25%.
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 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings have been markedly higher.
The latest reading of the six month annualised growth rate of the indicator fell in May, from April’s revised figure of +2.86% to +1.47%.
“The growth rate in the Leading Index has normalised significantly over the last six months to signal a more sustainable above-trend growth rate through the remainder of 2021 and 2022,” 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 annual GDP growth rate of around 4.25% in the third or fourth quarters of 2021.
Longer-term Commonwealth Government bond yields rose noticeably on the day, ignoring relatively stable US Treasury yields overnight. By the end of the day, the 10-year ACGB yield had gained 5bps to 1.56% and the 20-year yield had gained 6bps to 2.22%. The 3-year yield finished 1bp higher at 0.34%.