Australia’s growth pulse has cooled again, with the Westpac–Melbourne Institute’s key forward indicator edging lower in November and pointing to only a mild pickup in activity next year.
The six‑month annualised growth rate in the Westpac–Melbourne Institute Leading Index eased to +0.16% in November from +0.32% in October, signalling a softer pace of activity relative to trend over the next three to nine months.
Westpac economist Ryan Wells (pictured) noted the index has retreated from a “brief stint in slightly above-trend territory,” and is now “indicative of some stalling in momentum."
"Westpac expects that activity will only pick up slightly from here, from 2.1%yr currently to 2.4%yr over 2026, which Westpac views as being roughly around trend,” Wells said.
Despite the latest monthly dip, Wells said the leading index growth rate has “nonetheless lifted touch over the past six months, up 0.07ppts from +0.09% in May to +0.16% in November.”
Earlier weakness in the index had been partly attributed to heightened uncertainty around US President Trump’s so‑called "reciprocal tariffs," a factor Wells said has now eased.
Five of the eight index components have contributed to the small gain since May. Commodity prices in AUD terms have been a key driver, having “shifted from acting as a material drag to a modest positive” and adding +0.16ppts.
Dwelling approvals have also supported the index, contributing around +0.11 percentage points, although recent volatility suggests this component may remain choppy in the months ahead.
After “surprisingly sharp improvements” in November, both the Westpac–MI Consumer Expectations and Westpac–MI Unemployment Expectations Index “have broadly retreated back to earlier levels.”
On a combined basis, those sentiment measures are still estimated to have added about +0.08 percentage points to the leading index growth rate over the past six months, while the S&P/ASX 200’s contribution has dropped sharply after November’s share‑market sell‑off, to around +0.04 percentage points.
The main headwinds for the leading index are increasingly coming from jobs and offshore activity.
“The main drags have come from a decline in hours worked (detracting –0.13ppts), reflecting the gradual softening in the labour market to date, alongside a smaller contribution from US industrial production (detracting –0.09ppts) and reduced support from the yield spread (detracting –0.09ppts),” Wells said.
In recent weeks, the yield spread between longer‑term bonds and short‑term bills has continued to widen as markets price in a more hawkish policy outlook, reducing the support that a steeper curve would normally provide.
The Reserve Bank’s Monetary Policy Board next meets on 2–3 February.
Wells noted that “risks to inflation have tilted to the upside recently, and although the RBA has recognised that some of this reflects temporary factors, it has clearly taken some signal from it.”
While Westpac still expects inflation to moderate in 2026, “the MPB’s more hawkish view has pushed back the timing of any further policy easing into 2027.”
Wells cautions there are “risks to both sides” of that outlook: “If inflation were to continue surprising materially to the upside, the possibility of a rate hike would lift. But if the labour market were to weaken by more than expected, earlier rate cuts could be brought back on the table.”
The latest leading index update follows separate Westpac–Melbourne Institute data showing consumer sentiment dropped 9% to 94.5 in December, pulling confidence back into “cautiously pessimistic” territory as renewed inflation and rate‑hike fears weighed on households.
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