Summary: Leading index growth rate up in March; February reading revised up; growth prospects “are encouraging”; reading implies annual GDP growth of around 4.25%; figures consistent with Westpac’s upbeat view of economy’s growth momentum.
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 2021 mostly declined.
The March reading of the six month annualised growth rate of the indicator registered 1.71%, up from February’s revised figure of 1.02%. February’s reading was revised up from -0.25%.
Westpac Chief Economist Bill Evans described the figures from the early months of 2022 as signs “that growth prospects for the next 3 to 9 months are encouraging.”
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 4.25% in the June quarter.
Domestic Treasury bond yields moved higher on the day. By the close of business, the 3-year ACGB yield had gained 8bps to 2.73% while 10-year and 20-year yields both finished 4bps higher at 3.16% and 3.50% respectively.
In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.06%, firmed in favour of rate rises over the next twelve months. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May and then rise to 0.375% by June. February 2023 contracts implied a cash rate of 2.285%.
Evans noted the figures “are consistent with Westpac’s upbeat view of the growth momentum in the economy for most of 2022.” He expects GDP growth of “around 5.5%” over the year, with much of this growth “concentrated in the June and September quarters.”