Australia’s economic momentum has softened, with the Westpac-Melbourne Institute Leading Index showing a decline back below trend for the first time in nearly a year.
The six-month annualised growth rate in the index fell to -0.16% in August from +0.11% in July, pointing to weaker activity ahead.
Matthew Hassan (pictured), Westpac’s head of Australian macro-forecasting, said the update marks a shift after stronger results earlier in 2025.
“The Leading Index is pointing to a loss of momentum heading into year-end,” Hassan said. “The August update is the first negative, below-trend Index growth rate since September last year. While the weakness is not overly concerning it marks a clear softening from the above-trend momentum that was evident earlier in the year.”
Westpac expects the Australian economy to grow by 1.9% in 2025, up from 1.3% in 2024 but still slightly below trend. Growth is forecast to return to trend in 2026.
The softer outlook comes as mortgage holders and investors look ahead to a possible November rate cut. CBA economists expect the RBA to deliver just one more reduction before pausing the easing cycle, citing an economy “picking up a little bit more quickly than expected.”
The June quarter national accounts showed the economy grew 0.6% for the quarter and 1.8% year-on-year, supported by firmer consumer spending. But Hassan noted that much of the strength came from temporary factors, including the timing of public holidays and a lift in spending during end-of-financial-year sales.
Westpac’s card spending tracker indicates growth has cooled again since mid-year.
“Australia’s economic recovery continues to be a stop-start affair,” Hassan said.
The Leading Index growth rate has slowed sharply from a 0.86% peak in February to –0.16% in August, a turnaround of just over one percentage point.
According to Westpac, most of the weakening has come from:
Rising consumer unemployment expectations (-0.34ppts)
Lower commodity prices in AUD terms (-0.25ppts)
Softer consumer expectations (-0.22ppts)
Declining dwelling approvals (-0.19ppts)
Additional smaller drags came from the yield spread, US industrial production and hours worked (-0.18ppts combined).
The only positive contributor has been the share market, where a 10% rally in the S&P/ASX200 added +0.16ppts.
The Reserve Bank board meets again on Sept. 29-30 and is expected to keep the cash rate on hold at 3.6%.
Hassan noted that policymakers are likely to wait for more clarity on inflation and demand. However, Westpac still anticipates a 25bp rate cut in November, followed by two more cuts in 2026.
CBA has taken a similar view, though economist Harry Ottley told Australian Broker that “the base case is for just one more cut in November.” He added that further reductions into 2026 may not be needed given the economy’s stronger-than-expected momentum.
The RBA itself has signalled a wait-and-see approach. Governor Michele Bullock recently warned that stronger consumer spending could delay further cuts, even as inflation continues to ease and unemployment remains historically low at 4.2%.
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