Australia’s stop‑start recovery is back under scrutiny after the latest Westpac–Melbourne Institute Leading Index signalled that growth momentum is close to stalling just as further interest rate hikes loom.
The six‑month annualised growth rate of the composite index – a guide to economic conditions three to nine months ahead – edged down to +0.02% in January from +0.44% in December, effectively pointing to activity running around trend rather than building a clear upswing.
Westpac’s Matthew Hassan (pictured) notes that the modest acceleration seen in the second half of 2025 “was not all that convincing in the first place,” with the index showing mostly lukewarm strength and even a pause partway through the year. That tentative improvement now appears to have faded in early 2026.
Under the surface, the deterioration is being driven primarily by households and housing. Measures of consumer expectations and a volatile pattern in dwelling approvals have been the biggest drags on the index over the past six months. Hassan warns that “the softer signals from consumer sentiment-based measures are likely to persist,” as higher borrowing costs reshape expectations for interest rates, employment and income.
Commodity prices have provided an important cushion, contributing positively to the index over the period as global prices climbed in US‑dollar terms. However, this boost has been partly diluted by a stronger Australian dollar, and the report cautions that the support from commodities “may also be passing” if the currency’s recent surge is sustained.
Despite the loss of momentum in the leading gauge, Westpac still expects GDP to expand by around 2.5% in 2026, roughly in line with its estimate of trend growth.
NAB business survey shows softer demand and squeezed margins but resilient jobs, backing Westpac’s view of an economy running near trend as a May RBA hike looms.
Markets will now focus on the Reserve Bank of Australia’s Monetary Policy Board meeting on March 16–17. While a back‑to‑back hike is not ruled out, Westpac thinks the central bank is more likely to pause, waiting for the April 29 CPI data. With inflation expected to remain uncomfortably high, the bank warns that “another 25bp rate hike looks likely to come at the MPB’s May 4–5 meeting,” keeping policy firmly in tightening mode even as forward indicators cool.
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