State Economic Update – October 2012

Economic conditions in NSW are likely to improve only marginally over the coming year with conditions within the state likely to vary wildly. By all measures, the Victorian economy continues to under perform the national average, with SFD growth slowing to 2.1 per cent in 2011-12

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Australian economic commentary on a state by state basis.

NSW

Economic conditions in NSW are likely to improve only marginally over the coming year with conditions within the state likely to vary wildly. As opposed to its southern neighbour, NSW does have an investment driver, with around $20 billion in the mining investment pipeline. NSW also has the tightest housing market in the country, suggesting that dwelling investment could provide a catalyst for growth. The timing of this boost in dwelling investment, however, is in question. Building approvals data, while improving, remain quite weak meaning that any kick to growth may not come until mid-to-late 2013, if not later. Elsewhere, conditions remain challenging. Consumer caution and a subdued manufacturing sector are weighing on non-residential construction and household consumption while the recent falls in commodity prices could impact export incomes. While mining investment provides a welcome boost to the state, the relatively small share of this to the NSW economy suggests that NSW will likely grow below trend in 2012-13.

Victoria

By all measures, the Victorian economy continues to under perform the national average, with SFD growth slowing to 2.1 per cent in 2011-12 while Victorian businesses are among the least confident in the country. In fact, were it not for household consumption of services (accounting for 1.2 percentage points of SFD growth), the Victorian economy would look much weaker on national accounts measures. Plaguing the Victorian economy is the ongoing structural adjustment to the high AUD, impacting manufacturing and services trade, once key drivers of the Victorian economy. Private investment should remain weak, as dwelling investment responds to lower prices. Interstate trade may provide some relief as Victoria is a net beneficiary of trade with the resource states. However, much of the capital equipment required for the mining investment boom is sourced through foreign trade, meaning interstate trade potential may be limited. In all, we see Victoria remaining the weakest of the mainland states and conditions are likely to remain very subdued through 2012-13.

Queensland

In terms of economic growth,Queensland is firmly entrenched in the fast lane of the multi-speed economy with SFD growth having accelerated to 9.5 per cent in 2011-12. Underpinning growth was a massive 38 per cent increase in private business investment as the construction phase of a number of major coal and LNG projects kicked off. Elsewhere, however, the Queensland economy is showing signs of weakness, particularly in the south-east. The stubbornly high AUD is biting into tourism, international student enrolments and manufacturing exports while a weak housing market in the south-east has kept dwellings investment subdued. Similarly, with most growth in Queensland taking place in the more capital intensive parts of the economy, unemployment is among the highest in the country. Coming into 2012-13, we expect above-trend growth, however, as factors impacting the labour intensive parts of the Queensland economy persist, unemployment could remain relatively high.

Western Australia

The WA economy is in a league of its own, with SFD growth of almost 15 per cent in 2011-12, underpinned largely by a 42 per cent increase in private business investment. Even the household sector, a drag on growth in other states, is strong with household consumption increasing 6.3 per cent (largely due to income growth rather than a reduction in the savings rate) while discretionary spending has also been solid. One area of weakness has been dwelling investment although recent weakness should unwind given the uplift in underlying demand. In all, the size and scale of the mining investment boom should see WA easily outperform the rest of the country for much of the foreseeable future.

South Australia

Conditions in the SA economy are very much subdued, with SFD generally under performing through 2011-12, growing at just 1.9 per cent. More recently, SA has seen a slight pick up in growth in non-residential building construction although this has been largely offset by broad-based weakness elsewhere. With the recent delay of the Olympic Dam expansion and little else in terms of mining capital expenditure, economic growth in SA is likely to remain sluggish through 2012-13.

Tasmania

Tasmania’s economy is very much the weakest of the Australian states. SFD contracted by 1.2 per cent in 2011-12 while the outlook remains very bleak. Tasmanian consumers are the most cautious in the country, and government de-leveraging has been felt more harshly in Tasmania than elsewhere (due to public demand accounting for 29 per cent of SFD). Some support may be provided by hydro and dairy related investment. However, growth will still be very much subdued through 2012-13.

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