Summary: Leading index declines in April; “strong above-trend” GDP growth expected; reading implies annual GDP growth to rise to around 5.5% during second, third quarter; year to December 2021 GDP growth expected to be around 4.5%.
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 declined in April, from March’s revised figure of +3.31% to +2.85%.
“The Leading Index growth rate continues to point to strong above-trend growth momentum carrying through the second half of 2021 and into early 2022,” said Westpac senior economist Matthew Hassan.
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 5.5% in the second or third quarters of 2021.
Longer-term Commonwealth Government bond yields fell on the day, slightly lagging falls in US Treasury yields overnight. By the end of the day, the 10-year ACGB yield had lost 2bps to 1.61% and the 20-year yield had lost 4bps to 2.29%. The 3-year yield finished 1bp higher at 0.21%.
The RBA’s May Statement on Monetary Policy forecasts GDP growth for the years ending June 2021 and December 2021 to be 9.25% and 4.75% respectively. Should the RBA’s forecasts prove to be accurate, an increase of 2.4% in first half is implied. Westpac also currently expects an increase of 2.4% in the first half but a slightly-lower 4.5% for the 2021 calendar year.