An indicator of Australian economic activity slowed further in June, weighed down by weaker commodity prices and soft domestic conditions amid subdued growth prospects, according to a report by Westpac and Melbourne Institute published on Wednesday.

The Westpac-Melbourne Institute Leading Index, which indicates the likely pace of economic activity relative to trend three to nine months into the future, fell to 0.03% in June from 0.1% in May.

Australia's economic recovery remains sluggish, with Westpac forecasting just 1.7% growth in the current year, a modest uptick from 2024 but still well below the long-term average, signaling continued weakness in per capita terms, said Matthew Hassan, head of Westpac's Australian macro-forecasting.

The leading index has slowed sharply over six months, with five of its eight components dragging on growth, and the biggest drag coming from weaker commodity prices, which have reduced the index by 0.24 percentage points since December due to a 5.3% decline in US dollar prices and a 2.6% rise in the Australian dollar, Hassan said.

Softening total hours worked and weaker consumer expectations have slowed growth, while mixed signals from dwelling approvals, unemployment expectations, financial markets, the yield gap, and US industrial production point to a subdued economic outlook.

The index highlights continued economic vulnerability, with potential setbacks from slowing US growth, market volatility, and interest rate concerns ahead of the Reserve Bank's August meeting, where a favorable inflation report could trigger a gradual series of rate cuts into 2026, Hassan added.