Summary: Leading index growth rate up slightly in March; consistent with below-trend growth through 2023; reading implies annual GDP growth of around 2.00%; ACGB yields higher; rate-rise expectations firm.
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, 2022 and the early part of 2023.
The March reading of the six month annualised growth rate of the indicator registered -0.75%, up a touch from February’s revised figure of -0.79%.
“The Index for March is now consistent with below-trend growth extending throughout the remainder of this year,” said Westpac Chief Economist Bill Evans. “Westpac is forecasting growth of only 1% in 2023.”
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 “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 thus represents an annual GDP growth rate of around 2.00% in the next quarter.
Domestic Treasury bond yields increased on the day, ignoring generally downward movements of US Treasury yields overnight. By the close of business the 3-year ACGB yield had gained 9bps to 3.15%, the 10-year yield had added 4bps to 3.52% while the 20-year yield finished 3bps higher at 3.94%.
In the cash futures market, expectations regarding another 25bps rate rise firmed. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.57% to average 3.655% in May and then rise to an average of 3.785% in August. November contracts implied a 3.745% average cash rate while May 2024 contracts implied 3.55%, just 2bps below the current cash rate.