The latest read on Australia’s growth pulse is flashing amber, with Westpac warning the economy is set for a period of sub‑trend expansion just as further interest rate hikes loom.
Westpac’s March Westpac–Melbourne Institute Leading Index, which tracks likely economic growth three to nine months ahead, showed the six‑month annualised growth rate “declined to –0.13% in March from +0.05% in February.”
“The Australian economy has lost momentum over the first few months of the year with more weakness likely to emerge in the months ahead,” said Matthew Hassan, Westpac's head of Australian macro‑forecasting.
That loss of momentum is already visible in household sentiment, with the Westpac–MI Consumer Sentiment Index recording its largest fall since COVID‑19, down 12.5% to a deeply pessimistic 80.1.
The index has shifted from a mildly positive +0.31% in October to negative territory, marking the first below‑trend reading since August last year and the first meaningful deterioration since the “cost‑of‑living” slowdown of 2022–2024.
Westpac’s analysis points to several headwinds. On top of weaker sentiment, the sharemarket sold off sharply in March and the yield curve has flattened as short‑term interest rates moved higher. Westpac estimates roughly 60% of the drag from these components is linked to the conflict in the Middle East and the associated global energy shock. The March NAB business survey also showed confidence collapsing, even as trading conditions and employment held around average levels, suggesting the underlying economy could stay resilient if current risks ease.
Partially offsetting this, higher commodity prices and a lift in dwelling approvals have added modest support. However, Hassan notes that approvals have been volatile month to month, making it hard to read a clear signal for future housing construction.
Despite the softer growth signal, Westpac expects the Reserve Bank’s Monetary Policy Board to remain focused on inflation. Underlying measures are already above the 2–3% target band and are likely to push higher as energy costs feed through. Labour force data to March also showed the jobs market in reasonable health, with employment growth strengthening to around 1.5% year‑on‑year and the unemployment rate holding near 4.3%. This backdrop gives RBA more room to stay hawkish.
Westpac argues that “higher interest rates and the spike in fuel prices associated with the conflict in the Middle East are starting to weigh on growth momentum, albeit fairly mildly.” On balance, its economists still see a 25‑basis‑point cash rate rise in May, with “further moves likely in subsequent months.”
For brokers with self‑employed clients, Westpac highlights fuel‑sensitive sectors such as manufacturing, construction, transport and tourism as ones to watch for cashflow stress if the shock persists.
Get the hottest and freshest property and mortgage news delivered right into your inbox. Subscribe now to our FREE daily newsletter.
