Australia leading index steady. Growth outlook softens to below trend on rate hikes & war

Australia’s leading index holds just above trend, but momentum is fading as headwinds build.Summary:Westpac–Melbourne Institute Leading Index held at +0.08% in February (unchanged from January)Down from +0.13% in September, signalling moderating momentumGrowth remains slightly above trend but losing paceFinancial components (ASX cooling) offset by commodities and hours workedRBA rate hikes and Middle East conflict expected to weigh furtherWestpac sees GDP slowing to ~2.0% in 2026 (from 2.5% in 2025)Australia’s growth outlook is showing early signs of softening, with the Westpac–Melbourne Institute Leading Index holding steady at +0.08% in February on a six-month annualised basis, unchanged from January but down from stronger readings late last year.The index, which provides a guide to economic activity three to nine months ahead, suggests that momentum remains slightly above trend in early 2026. However, the modest pace of growth and recent trajectory point to a gradual loss of momentum as headwinds begin to build.The current reading marks a step down from +0.13% recorded in September, with the moderation largely driven by developments in financial markets. In particular, the contribution from the S&P/ASX 200 has weakened significantly, shifting from a positive +0.19 percentage points contribution to broadly neutral. Forward signals suggest equities may soon become a drag on the index, reflecting softer market sentiment and tighter financial conditions.Partially offsetting this has been support from higher commodity prices and stronger hours worked, which have helped keep the index in positive territory. However, these supports may prove insufficient as broader macro pressures intensify.Westpac expects the combination of recent interest rate hikes by the Reserve Bank of Australia and the economic fallout from the Middle East conflict to weigh more heavily on activity in the months ahead. Higher borrowing costs are already beginning to constrain demand, while elevated energy prices and global uncertainty are likely to dampen both business and consumer confidence.As a result, Westpac forecasts Australia’s GDP growth to slow to around 2.0% in 2026, down from 2.5% in 2025, a pace considered below trend for the economy. While early signals of this slowdown are evident in the February reading, the impact is expected to become more pronounced in coming months as policy tightening and external shocks fully feed through.In the current environment, the Leading Index underscores a key shift: while the Australian economy has remained resilient, the balance of risks is tilting toward slower growth. With financial conditions tightening and global uncertainties rising, the outlook is increasingly one of moderation rather than expansion.
This article was written by Eamonn Sheridan at investinglive.com.

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