Summary: Leading index growth rate up in January, no longer negative; first positive reading since Delta lockdowns; reading implies annual GDP growth of around 3.15% during June/September quarters; Westpac expects zero GDP growth in March quarter
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 were markedly higher but readings through much of 2021 steadily declined.
The January reading of the six month annualised growth rate of the indicator registered +0.40%, up from December’s -0.10%. The result ended a four-month run of negative readings for the index.
“This is the first positive, above trend, read on the Index growth rate since the ‘Delta’ lockdowns impacted in August last year. With the growth rate now in positive territory, the Index is signalling that the growth outlook has improved with above trend growth over the next three to nine months likely,” 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 in Australia. The index is said to lead GDP by up to nine months, so theoretically the current reading represents an annual GDP growth rate of around 3.15% in the second or third quarters of 2022.
Domestic Treasury bond yields moved higher on the day, slightly lagging the overnight movements of their US Treasury bond counterparts. By the close of business, the 2-year ACGB yield had inched up 1bp to 1.71% while 10-year and 20-year yields both finished 5bps higher at 2.25% and 2.72% respectively.
Evans said Westpac expects zero GDP growth in the March quarter after a contraction in spending in January but “the economy is likely to bounce back strongly over the remainder of 2022, registering a solid 5.5% growth rate for the year overall.”