Summary: Leading index growth rate up in July; Westpac: broader picture one of stabilisation rather than recovery; reading implies annual GDP growth of around 2.25%-2.50%; ACGB yields fall; rate-cut expectations firm; Westpac: growth momentum looks likely to remain bogged down for some time; Westpac: forecasts 1.6% GDP growth in calendar 2024, 2.3% in calendar 2025.
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 and 2022 before flattening out in 2023 and 2024.
July’s reading has now been released and the six month annualised growth rate of the indicator registered +0.06%, up from June’s figure of -0.13%. The index reading represents a rate relative to “trend” GDP growth, which is generally thought to be around 2.50% to 2.75% per annum in Australia.
“Despite the positive monthly read, the broader picture still looks to be one of stabilisation rather than recovery,” said Westpac senior economist Matthew Hassan. “The last nine months has seen the Index growth rate hover in the –0.3% to +0.2% range, a clear improvement on the twelve months prior which saw much weaker reads in the –0.5% to –1% range.”
Westpac states the index leads GDP growth 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 may therefore be considered to be indicative of an annual GDP growth rate of around 2.25% to 2.50% in the next quarter.
Domestic Treasury bond yields fell moderately across the curve on the day. By the close of business, 3-year and 10-year ACGB yields had both shed 6bps to 3.51% and 3.90% respectively while the 20-year yield finished 4bps lower at 4.28%.
Expectations regarding rate cuts in the next twelve months firmed, with a February 2025 rate cut fully priced in. Cash futures contracts implied an average of 4.325% in September, 4.305% in October and 4.24% in November. February 2025 contracts implied 4.035% while July 2025 contracts implied 3.535%, 80bps less than the current cash rate.
“However, outright positives have proven hard to sustain,” Hassan added. “Sharp falls in commodity prices in recent weeks suggest momentum is likely to weaken again in the August month. Meanwhile, other potential positives appear to be further off, the RBA all but ruling out the prospect of rate cuts this year. All up, growth momentum looks likely to remain bogged down for some time yet.”
Westpac is currently forecasting GDP growth to be 1.6% in calendar 2024, rising to 2.3% in calendar 2025. The RBA’s August Statement on Monetary Policy forecasts were slightly different, with GDP growth for the years ending December 2024 and December 2025 to be 1.7% and 2.3% respectively.