Summary: Leading index growth rate up a little in December, still negative; reflects “high degree of uncertainty” around near-term outlook; strong reopening forces from December quarter currently impacted by omicron spread; reading implies annual GDP growth of around 2.50% during June/September quarters; Westpac raises December quarter GDP forecast to 2.6%, cuts March quarter to zero.
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 were markedly higher but more-recent readings have steadily declined.
The December reading of the six month annualised growth rate of the indicator registered -0.15%, up a little from November’s -0.19%. This latest report marks the fourth consecutive month of negative readings for the index.
“The Index growth rate remains in slight negative territory in December, consistent with the high degree of uncertainty around the near-term outlook as the strong reopening forces we saw in the December quarter are impacted by the current spectacular spread of Omicron,” 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 up to nine months, so theoretically the current reading represents an annual GDP growth rate of around 2.50% in the second or third quarters of 2022.
Domestic Treasury bond yields generally moved lower on the day, despite substantial rises in US Treasury yields overnight. By the close of business, the 2-year ACGB yield had lost 3bps to 1.52% and the 10-year yield had shed 8bps to 1.98%. The 20-year yield finished unchanged at 2.56%.
Westpac has recently raised its GDP growth forecast for the December quarter from 2.2% to 2.6% on the back of retail sales figures from October and November. However, the bank also cut its March quarter forecast from 2.3% to zero.