A forward-looking indicator of economic growth has sunk to its lowest level since the COVID-19 pandemic.

The Westpac-Melbourne Institute leading index returned its 10th negative result in a row in June.

The six-month annualised growth rate in the index, which signals the likely pace of economic activity relative to trend three to nine months into the future, fell to negative 1.09 per cent in May from negative 0.78 per cent in April.

Westpac Group chief economist Bill Evans said this was the lowest growth rate result since the pandemic.

Mr Evans said the negative growth rates pointed to below-trend economic growth to come, with the bank’s economists expecting lacklustre activity throughout 2023 and into 2024.

Westpac has revised its 2023 growth forecasts down to 0.6 per cent, lower than the one per cent growth predicted earlier.

In 2024, the bank expects the economy to grow by one per cent, down from 1.5 per cent.

“This weakness in the economy is centred around the consumer but also reflects a slowing global economy; a downturn in dwelling construction; and a progressive weakening in the labour market,” Mr Evans said.

Six of the eight components pulled the index down, with the yield spread producing the largest subtraction over the month.

Rising interest rates and cost of living pressures have also been weighing on consumers.

Not only have consumers been holding back on nice-to-haves, but spending on essentials has also eased based on Visa transaction data.

The firm’s spending momentum index sunk 0.9 points to hit 98.8 in May, reversing an improvement over the month before.

All spending categories are now in contractionary territory – that is, below 100 per cent – aside from non-discretionary, or essentials.

These patterns are likely to continue as rising interest rates and red-hot inflation turn people away from restaurants and other non-essential spending in favour of cheaper alternatives such as eating in.

At 101.5 index points, non-discretionary spending remains in expansive territory but it did fall 0.7 points over the month.

Discretionary spending contracted a further 0.2 points to 97.5.

The index also revealed a slowdown in spending in restaurants and fuel.

 

Poppy Johnston
(Australian Associated Press)