The Westpac-Melbourne Institute Leading Index, which forecasts the future pace of economic activity, recorded a six-month annualised growth rate of 0.58% in January, a rise from December’s 0.24%.
This improvement indicates the strongest economic growth since July 2022, a period characterised by Reserve Bank’s (RBA) aggressive interest rate hikes in response to inflation pressures and their impact on household finances.
According to Matthew Hassan (pictured above), head of Australian macro-forecasting at Westpac, this growth trend suggests a solidifying recovery, albeit gradual rather than rapid.
“The detail is becoming more convincing,” Hassan said, pointing out that the positive growth signal has now been sustained for four consecutive months, following a year of mostly below-trend performance.
This sentiment is echoed by a ScotPac report predicting a recovery from the economic strains of 2024.
The recent uplift in the leading index has been driven by multiple factors including improvements in consumer conditions, supportive lower interest rates, a resurgence in dwelling construction, and stable commodity prices aided by a depreciating Australian dollar.
Remarkably, for the first time since June 2021, all eight components of the leading index have contributed positively to the growth rate.
The most significant impact has come from commodity prices, which, despite a global price decline, have improved in AUD terms due to the currency’s depreciation.
Other positive contributions include better consumer unemployment expectations and a recovery in consumer sentiment, which collectively added 0.27 percentage points to growth.
Further boosts came from stronger dwelling approvals and a widening yield spread, indicating expected economic expansion.
The leading index suggests a moderate improvement in economic momentum, aligning with forecasts from both Westpac and the RBA.
“The board decided to cut the cash rate by 25bps at its February meeting but made it clear in communicating the move that further easing is far from assured,” Hassan said. “The latest leading index update shows the Australian economy is seeing a modest lift in momentum.”
With the next RBA meeting scheduled for March 31-April 1, the focus will remain on inflation and the labour market’s health to guide further policy decisions.
While further easing in 2025 remains possible, immediate additional rate cuts appear unlikely.
This overview reflects a cautiously optimistic outlook for Australia’s economy, with growth indicators showing resilience and a potential for sustained recovery through 2025.
