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Australia’s economy is expected to remain stuck in a slow recovery phase, with new data from the Westpac-Melbourne Institute Leading Index pointing to only modest gains in the next two years.
The index edged up to 0.12% in July from 0.01% in June. While this marks a slight improvement, the reading still sits only just above trend. Westpac forecasts GDP growth of 1.7% in 2025, following the 1.3% recorded in 2024, with a return to the longer-term trend rate of 2.2% not expected until late 2026.
“The ‘slow motion’ recovery reflects both the mildness of the preceding downturn and the shape of the interest rate easing cycle, which is coming through more gradually and is expected to result in a smaller cumulative decline than in previous cycles,” the report said.
Much of the drag has come from weakening commodity prices. After stalling in the second half of 2024, prices have fallen through 2025, subtracting 0.25 percentage points from the index’s growth rate. The effect reflects both lower US dollar commodity prices and the appreciation of the Australian dollar.
Labour market indicators have also turned softer. Total hours worked have fallen and consumer expectations have eased, together reducing the index growth rate by 0.22 percentage points since January. Other components, including dwelling approvals and unemployment expectations, have shown improvement in the latest month but remain weak overall.
The index began 2025 at 0.61% but has since dropped nearly half a percentage point, highlighting the loss of momentum. Financial market factors have provided only limited support: the S&P/ASX200 has posted a modest net gain for the year, and the yield gap has become slightly more positive as Reserve Bank rate cuts take effect, adding just 0.13 percentage points to the index.
The Reserve Bank of Australia’s Monetary Policy Board will meet on September 29 to 30. Westpac economists noted that while further easing is likely to be needed to support growth, the Board may hold rates steady at this meeting before a possible 25-basis-point cut in November.
