Summary: Leading index increases in March; indicators point to “strong” consumer spending; reading implies annual GDP growth to rise to around 5.75% during second, third quarter; RBA’s GDP forecasts expected to be exceeded.
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 increased in March, from February’s revised figure of +3.00% to +3.29%.
“The reopening of the economy, cashed up households and an eleven-year high in Consumer Sentiment all point to strong spending,” 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 5.75% in the second or third quarters of 2021.
Commonwealth Government bond yields fell across the curve on the day, slightly outpacing falls in US Treasury markets overnight. By the end of the day, the 3-year ACGB yield had lost 2bps to 0.26%, the 10-year yield had shed 5bps to 1.69% while the 30-year yield finished 6bps lower at 2.39%.
The RBA’s February Statement on Monetary Policy forecast GDP for the years ending June 2021 and December 2021 to be 8.0% and 3.5% respectively. Should the RBA’s forecasts prove to be accurate, an increase of just 1.3% in first half is implied. Evans currently expects an increase of 2.4% in the first half and 4.5% for the calendar year.