Westpac with the note.
- Leading Index growth rate ticks up to 0.12% in July.
- ‘Slow motion’ recovery continues to underwhelm.
- Main headwind coming from commodity price falls and higher AUD.
- Softer tone from labour market but other components lacking direction.
Even with this small improvement, the Leading Index still points to sluggish growth momentum in the second half of 2025 and early 2026. The recovery that started to take shape in last year continues to proceed slowly. Westpac expects the Australian economy to grow by just 1.7% this year, a marginal improvement on the 1.3% gain in 2024. Growth is only expected to return to a trend pace of 2.2% by the end of 2026.
The ‘slow motion’ recovery reflects both the mildness of the preceding downturn and the shape of the interest rate easing cycle, which is coming through more gradually and is expected to result in a smaller cumulative decline than in previous cycles.
The Leading Index continues to show a loss of traction over the last six months. Having started the year at a healthy 0.61%, the growth rate has dropped nearly half a percentage point to 0.12% in July, only a touch above trend. Six of the eight components have contributed to the slowdown.
The biggest drag has come from the weakening in commodity prices. A flat second half of 2024 has given way to material price declines in 2025, taking 0.25ppts off the headline Index growth rate. Note that this component is measured in AUD terms with the weakness due to both declining USD prices for Australia’s commodities and a firming in the Australian dollar.
The first half of the year has also seen some loss of momentum around domestic labour markets. A decline in total hours worked and softening in the Westpac–Melbourne Institute Consumer Expectations Index have taken another 0.22ppts off the index growth rate since January.
I expect both of those to get worse, not better, from here.
