Australia's Westpac-Melbourne Institute Leading Index rose to 0.8% in February from 0.6% in January, signaling a modest recovery ahead, according to data released Wednesday.

The lift reflects gains from higher commodity prices and a weaker Australian dollar, but these tailwinds are fading as US tariff measures weigh on markets.

The S&P/ASX200 fell 4.2% in February and another 4% in early March.

Commodity prices added 0.43 percentage points to the index.

CommBank Research expects the 2024/25 budget deficit to improve to AU$22.5 billion from the MYEFO estimate of A$26.9 billion (1% of GDP), supported by stronger commodity prices, a weaker dollar, and labor market strength.

Domestic factors like consumer sentiment and labor market expectations added 0.47 points to the index, up from 0.02 points six months ago.

Westpac expects GDP growth to reach 2.2% in 2025, up from 1.3% in 2024 but below the 2.5-3% trend.

CommBank sees the 2025/26 deficit widening to AU$49.5 billion from the MYEFO forecast of A$46.9 billion (1.6% of GDP) due to higher spending. A sharp US-China tariff slowdown remains the biggest risk.

Westpac expects the Reserve Bank of Australia to hold rates steady at its March 31-April 1 meeting, with a possible cut in May if inflation eases.