Summary: Leading index growth rate falls again in August; index holds up “surprisingly well” during latest downturn but likely “more weakness on the way”; reading implies annual GDP growth of 3.25% during December/March quarters; Westpac cuts September, December quarter growth forecasts again, still expects 7%+ over 2022.
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 latest reading of the six month annualised growth rate of the indicator fell in August, from July’s revised figure of +1.40% to +0.50%.
“The Leading Index has held up surprisingly well during this downturn but it seems likely that there is more weakness on the way,” 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 3.25% in the final quarter of 2021 or the first quarter of 2022.
Long-term domestic Treasury bond yields moved slightly lower on the day. By the close of business, the 10-year ACGB yield had lost 2bps to 1.28% and the 20-year yield had slipped 1bp to 1.91%. The 2-year yield finished unchanged at 0.36%.
Westpac has again cut its September quarter GDP growth forecast, this time from -2.6% to -4.0%. Additionally, the bank’s December quarter forecast has been pruned from 2.6% to 1.6%. However, Westpac also expects a 7.4% growth rate over calendar 2022.