Australia’s growth outlook remains steady but subdued, with Westpac’s Melbourne Institute Leading Index showing the economy tracking close to trend heading into 2026.
The six-month annualised growth rate in the index lifted to +0.04% in September, from -0.16% in August, signalling around-trend growth over the next six to nine months.
“The Leading Index continues to show a moderation in momentum compared to the start of the year but with the pulse still pointing to around-trend growth in early 2026,” said Matthew Hassan (pictured), Westpac’s head of Australian macro-forecasting.
After peaking at 0.83% in February, the index slowed to around zero by midyear. Westpac expects GDP growth of about 2% in 2025, rising to a trend pace in 2026.
Six of the eight components in the leading index have contributed to the moderation in recent months, with growth easing by 0.44 percentage points since March.
“The biggest drags have come from a pull-back in dwelling approvals (taking -0.24ppts off the overall Index growth rate) and softening commodity prices, measured in AUD terms (taking off a further –0.21ppts),” Hassan said.
The Westpac economist noted that both factors may stabilise soon.
“The recent pull-back in dwelling approvals is likely temporary, with low interest rates, a wider housing market upturn and various federal and state government measures likely to drive a renewed lift at some stage,” Hassan said.
Other components of the leading index were mixed, with weaker consumer sentiment and reduced support from the yield spread offset by a strong equity market rally.
“The 12.8% surge in the S&P/ASX200 since March added 0.32ppts to the headline Index growth rate,” Hassan said.
The Reserve Bank will meet on Nov. 3-4, with economists expecting the next rate move to be a cut.
“With inflation within the target range and monetary policy still a little on the restrictive side, the next rate move can reasonably be expected to be down,” Hassan said.
“The latest Leading Index read shows momentum has faded since the start of the year. Without further interest rate support, we think it is at risk of drifting below trend again.”
For mortgage brokers, the combined results from Westpac and NAB suggest that Australia’s economy remains steady but fragile, with rate cuts expected to lift business and household confidence into early 2026.
Firmer business sentiment, easing borrowing costs, and stabilising inflation point to a gradual recovery in credit demand, particularly from first-home buyers and SMEs as conditions improve.
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