Summary: Leading index growth rate rises in September; sub-trend growth momentum into 2024; reading implies annual GDP growth of around 2.25%; ACGB yields rise materially; rate-rise expectations firm; Westpac: expects 1.2% GDP growth in calendar 2023, 1.1% annualised in first half of 2024.
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, 2022 and the first half of 2023.
The September reading of the six month annualised growth rate of the indicator registered -0.34%, up from August’s revised figure of -0.48%.
“September marks the fourteenth consecutive subzero read on the headline Index growth rate, implying that lacklustre sub-trend growth momentum will carry well into 2024,” 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 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 2.25% in the next quarter.
Domestic Treasury bond yields rose materially on the day following sharp increases of US Treasury bonds yields overnight. By the close of business, the 3-year ACGB yield had added 9bps to 4.19%, the 10-year yield had gained 11bps to 4.67% while the 20-year yield finished 12bps higher at 5.00%.
In the cash futures market, expectations regarding further rate rises firmed. At the end of the day, contracts implied the cash rate would increase from the current rate of 4.07% and average 4.145% through November, 4.205% in December and 4.275% in February. May 2024 contracts implied a 4.35% average cash rate while August 2024 contracts implied 4.355%, 29bps more than the current rate.
Hassan said Westpac expects GDP growth of just 1.2% in 2023 and an annualised growth rate of 1.1% over the first half of 2024. “This is well below population growth which will be running at around 2.3%.”