An economic activity indicator logged an above-trend growth in February, reinforcing expectations for a gradual recovery, Westpac and the Melbourne Institute reported Wednesday.

The six-month annualized 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, lifted to 0.8% in February from 0.6% in January, the report said.

Four of the eight components contributed to the turnaround from negative 0.3% in August 2024. These are commodity prices, a widening yield spread, improving consumer expectations for the labor market, and more upbeat economic prospects.

Despite the overall growth, the component detail "suggests the improved growth pulse is more fragile than it looks," said Matthew Hassan, head of Australian macro-forecasting at Westpac.

"Much of the gain reflects a firming in commodity prices and a lower Australian dollar that may now be largely behind us," Hassan noted. He also warned against external headwinds, which have started to weigh on the economy.

Westpac expects gross domestic product growth of 2.2% this year, up from 1.3% in 2024. On monetary policy, Westpac expects the Reserve Bank to cut its rate at the May meeting.