Summary: Leading index increases in January; continues likelihood of above-trend growth; reading implies annual GDP growth to rise to +7.25% during first half of 2021; February SoMP GDP forecasts 8% growth to June.
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, 2019 and the early months of 2020 before plunging to recessionary levels in the second quarter. Readings from the third and fourth quarters were markedly higher.
The latest reading of the six month annualised growth rate of the indicator increased in January, from December’s revised figure of +4.24% to +4.48%
“The growth rate of the Index continues to point to above-trend growth in the Australian economy through 2021,” 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 annualised GDP growth rate of around 7.25% in the second or third quarters of 2021.
Commonwealth Government bond yields moved significantly higher on the day, largely following similar rises in US Treasury bond markets overnight. By the end of the day, the 3-year ACGB yield had gained 3bps to 0.2%, the 10-year yield had jumped by 8bps to 1.41% while the 20-year yield finished 6bps higher at 2.11%.
In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, moved up a touch. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.08% by mid-2022.