Leading Index softens as tariff chaos starts to weigh
- Leading Index growth rate declines to 0.6%.
- Key components starting to capture tariff policy shock.
- Commodities, interest rate moves still the main positives.
- Cracks appearing around financial markets and confidence.
The six-month annualised growth rate in the Westpac–Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, slowed to 0.6% in March from 0.9% in February.
“While the Leading Index continues to show an above-trend growth pulse, the latest softening marks an important shift. Recall that the headline measure is a six-month annualised growth rate. Hence, even sharp monthly developments take time to move momentum. The Index is only just starting to capture the effects from the trade policy disruptions that escalated sharply following US President Trump’s ‘reciprocal’ tariff announcement on April 2. The situation is uncertain and there are other factors at play but some further softening in the growth pulse looks likely in the months ahead.”
“At this stage, the tariff shock to the Australian economy should still be relatively small and manageable. Westpac expects growth to track a slower recovery, lifting to 1.9%yr in 2025 revised down from a previously forecast 2.2%yr. However, risks are to the downside. The Leading Index will continue to be an important early gauge of how momentum is shifting,” commented Westpac Economics’ Head of Australian Macro forecasting, Matt Hassan.
“The component detail shows the slowdown to date has been centred on financial market and sentiment developments. “The Leading Index growth rate has lifted from –0.24% in September last year to +0.63% currently. Four of the eight components have driven the 0.87ppt improvement: commodity prices (measured in Australian dollar terms) adding 0.42ppts; a widening yield spread adding a further 0.34ppts; improving US industrial production adding a further 0.15ppts and improving consumer expectations for jobs adding another 0.12ppts.”
“Note that for the commodity price component, almost all of the move has come from a lower Australian dollar, which declined 6.5¢ vs the US dollar between September and late March. Remarkably, despite being down another 3.5¢ at one stage, the Australian dollar is now slightly above its March-end level. “These improvements have been partially offset by a correction in equity markets and a stalling in the recovery in consumer sentiment. The S&P/ASX200 has taken 0.18ppts off the headline growth rate since September, the Westpac-Melbourne Institute Consumer Expectations index shaving off another 0.1ppt.”
“Both of these drags are at risk of intensifying in the months ahead. Share markets plunged after the US tariff announcement on April 2 and are still down on March levels despite a solid rally later in the week following the announcement of a 90-day pause on tariff increases above 10% for countries other than China. Similarly, the April update on consumer sentiment showed sharply weaker reads over the course of the survey week that suggest the May survey, which will be run before the next RBA meeting, is coming from a considerably weaker starting point.”
The Westpac-Melbourne Institute Leading Index of Economic Activity for April 2025 was released at 11 am (AEST), Wednesday 16 April 2025. The next index will be released at 11 am (AEST), Wednesday 21 May 2025.
The Westpac–Melbourne Institute Leading Index of Economic Activity report examines movements in the leading indicator of economic activity in Australia. It is designed to anticipate economic growth in the next 3 to 9 months. Further information can be found here.