Summary: Leading index growth rate falls again in June; at level which is “more subdued but still strong”; reading implies annual GDP growth to rise to around 4.0% during third, fourth quarters; Westpac slashes September quarter GDP forecast from 0.9% to -0.7%.
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 June, from May’s revised figure of +1.68% to +1.34%.
“Over the last six months growth in the Leading Index has slowed from an extremely strong 4.20% to a more subdued, but still strong, 1.34% pace,” 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 4.0% in the third or fourth quarters of 2021.
Commonwealth Government bond yields mostly declined on the day, ignoring rises of long-term US Treasury yields overnight. By the end of the day, the 3-year ACGB yield had slipped 1bp to 0.27%, the 10-year yield had lost 2bps to 1.16% while the 20-year yield finished 1bp higher at 1.81%.
Up until recently, Westpac had been expecting an increase of 0.9% in the September quarter. Evans slashed that figure to -0.7% this week, citing extended restrictions in Victoria and New South Wales and additional measures in other states.