First negative reading since Sep 2020 from WBC-MI leading index

Summary:  Leading index growth rate falls again in September; first negative reading since September 2021; reading implies annual GDP growth of 2.25% during December/March quarters; “another strong rebound” expected once both Sydney, Melbourne reopen; Westpac maintains growth forecasts.

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 September, from August’s figure of +0.50% to -0.50%.

“This is the first negative read, signalling below trend growth, since September last year when the economy was moving out of COVID lockdowns,” 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 2.25% in the final quarter of 2021 or the first quarter of 2022.

Long-term domestic Treasury bond yields moved significantly higher on the day, outpacing overnight movements of their US Treasury counterparts. By the close of business, the 10-year ACGB yield had gained 8bps to 1.83% and the 20-year yield had jumped 12bps to 2.45%. However, shorter-term yields declined and the 3-year yield finished 2bps lower at 0.95%.

Evans noted September was the last full month in which Sydney and Melbourne were both facing “stay at home” orders. He expects “another strong rebound in the economy” once both cities reopen in a repeat of last year’s post-lockdown recovery. “Moreover, this recovery is not expected to be disrupted by the various state snap lock-downs that dogged the previous recovery through much of late 2020 and early 2021.”

Westpac has maintained its GDP growth forecasts for the September and December quarter at -4.0% and +1.6% respectively. Westpac also expects a 7.4% growth rate over calendar 2022.

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