Australia’s near-term economic outlook has weakened, with the Westpac–Melbourne Institute Leading Index slipping below trend for the first time since September 2023.
The six-month annualised growth rate of the Leading Index fell to -0.08% in May, down from 0.19% in April.
“The growth pulse has shown a significant deterioration since February, with May marking the first below-trend read since September last year,” said Matt Hassan (pictured), head of Australian macro-forecasting at Westpac Economics.
“The overall picture is consistent with Australia’s gradual recovery entering a shakier period.”
The Index, which forecasts economic activity relative to trend over a three- to nine-month horizon, has seen six of its eight components weaken over the past half-year.
“Over three quarters of the 0.43ppt deterioration has come from a weakening in dwelling approvals (-0.21ppts) and slowing growth in hours worked (-0.13ppts),” Hassan said.
Consumer sentiment indicators also contributed 0.24ppts to the decline.
Financial market volatility added further pressure.
“That volatility is seeing a bigger drag from the S&P/ASX200, which has taken an additional -0.16ppts off the index growth rate and a small negative contribution from commodity prices,” Hassan said.
While US industrial production contributed positively (adding 0.29ppts), the benefit may be short-lived.
“Protectionist tariff policies are likely to see US economic growth weaken near term,” Hassan said.
Westpac now expects Australia’s GDP growth to reach 1.7% year-on-year by the end of 2025 – a slight downgrade from previous forecasts.
“There is a solid case for further policy easing,” Hassan said. “However, we expect the RBA to continue to proceed cautiously… the next 25bp cut [is expected] in August, once the RBA has refreshed its economic forecasts.”
