The divergence between mining and non-mining state economies continues, although with mining investment now winding down it is the major non-mining economies that are starting to outperform. Although strong export performance in the mining states – as mining projects become operational – is contributing to Gross State Production (GSP) in the mining states, the rebalancing back towards the non-mining states has become apparent in domestic demand.

Over 2014, real state final demand (SFD) growth was strongest in NSW and Victoria, while WA and Queensland were in decline. Strong performance in residential property markets and better consumption contributed to the outcome, although both retail sales and property prices have lost some momentum more recently. Nevertheless, higher housing prices, low interest rates and an undersupply has encouraged a surge of residential construction approvals that should contribute notably to growth this year – particularly in NSW and Victoria.

• Budget positions – improving but focus remains on reducing expenditure as Commonwealth terminates/modifies some payments to states. Variation to GST relativities in light of significant drops in commodity prices will have significant implications for state revenues. The Commonwealth has announced a White Paper on Reform of the Federation and White Paper on Tax Reform.
• Credit ratings of most states and territories are seen to be stable but there remains much uncertainty around funding infrastructure spend and potential implications for budgets.
• States are well through funding programs for 2014-15 but the market now believes that issuance in 2015-16 will be greater than previously forecast.
• Semi-government bonds have been under pressure since the Queensland election and at least until the state budgets are released this pressure may persist. The semi-benchmark curve is likely to remain steep and we see value in 2019-21 part of the curve.

For further details please refer to the attached document.

• NAB Australian States Handbook April 2015