Summary: Leading index growth rate up in April; main negatives over last two years starting to dissipate; reading implies annual GDP growth of around 2.50%-2.75%; ACGB yields rise; rate-cut expectations soften; Stage 3 tax cuts to provide additional relief for household incomes.
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.
April’s reading has now been released and the six month annualised growth rate of the indicator registered -0.01%, up from March’s revised figure of -0.08%.
“The Leading Index is again showing signs of some stabilisation in growth momentum,” said Westpac senior economist Matthew Hassan. “That is broadly consistent with the notion that the main negatives over the last two years, the combined drag on household incomes from sharply higher living costs, interest rate rises and a surging tax take, are starting to dissipate.”
Index figures represent rates relative to “trend” GDP growth, which is generally thought to be around 2.50% to 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 is thus indicative of an annual GDP growth rate of around 2.50% to 2.75% in the next quarter
Domestic Treasury bond yields rose nearly uniformly across the curve on the day following the release of April CPI figures and significant rises of US Treasury yields on Tuesday night. By the close of business, the 3-year ACGB yield had increased by 12bps to 4.07%, the 10-year yield had gained 14bps to 4.41% while the 20-year yield finished 13bps higher at 4.71%.
In the cash futures market, expectations regarding rate cuts in the next twelve months softened considerably, although the catalyst was more likely the release of April’s CPI figures. At the end of the day, contracts implied the cash rate would remain close to the current rate for the next few months and average 4.315% through June and 4.35% in August. November contracts implied 4.36%, February 2025 contracts implied 4.32% while May 2025 contracts implied 4.235%, 9bps less than the current cash rate.
“The last six months has already seen a material moderation in inflation and the end to the RBA’s rapid series of interest rate rises,” Hassan added. “Coming months will see the Stage 3 tax cuts provide additional relief for household incomes, a prospect that is already supporting consumer sentiment a little.”
Westpac is currently GDP growth to be 1.6% in calendar 2024, rising to 2.5% in calendar 2025. The RBA’s May Statement on Monetary Policy forecasts GDP growth for the years ending December 2024 and December 2025 to be 1.6% and 2.3% respectively.