July 21, 2016

State Economic Handbook: July 2016

Solid growth across the large south-eastern states has become increasingly entrenched over the past year, while difficult conditions in the mining sector are having a more pervasive impact across Western Australia, the Northern Territory and parts of Queensland.

Divergence in reverse:

  • Solid growth across the large south-eastern states has become increasingly entrenched over the past year, while difficult conditions in the mining sector are having a more pervasive impact across Western Australia, the Northern Territory and parts of Queensland.
  • Looking forward, New South Wales and Victoria will remain in the lead in coming years in terms of state final demand, and real gross state product growth will be neck and neck. Services activity (including but not limited to tourism and education exports) is clearly outperforming, while both states are benefiting from strong population growth, high levels of housing construction, infrastructure expenditure and a modest pick up in wages. The challenge for both states will be to sustain momentum as the impetus to growth from the lower AUD and housing construction starts to tail off.
  • The combination of low commodity prices and lower mining investment is having a more pronounced impact on WA, the NT and parts of Queensland to differing degrees. The labour market adjustment in particular, and negative impact on labour incomes, will become more marked over coming years, with flow on effects to consumer spending, business investment and government revenue. In terms of timing, the drag will come earlier in Queensland, where all three major LNG projects have started shipping or are due for completion in 2016. While state final demand will remain weak however, real gross state product in these states will be supported by the surge in LNG export volumes currently underway.
  • Strength in tourism spending (both domestic and international) and education exports remain bright spots for most states and territories, including Queensland, Tasmania, SA and the larger states of NSW and Victoria – the NT however has not received the same boost over the past year. Higher income levels in Asia, coupled with Australia’s stable geopolitical environment should sustain tourism activity, although the pace of growth may ease as the pace of AUD depreciation diminishes.
  • Recent policy announcements in SA are also encouraging, and there are some greenshoots emerging in the monthly data. The capacity for growth to pick up in SA will be constrained by the more limited industrial base and ageing population – similar challenges remain for Tasmania.
  • Conditions in the ACT have also improved as public sector hiring freezes have been lifted, although fiscal pressure will remain a risk for the ACT given its dependence on the public sector.
  • Better rainfall will be positive for broadacre crop production and exports in WA, SA and NSW, although the low dairy price is a concern for Victoria and Tasmania.
  • The main area for which there is potential upside is private non-mining business investment. Even in the more diversified economies, forward-looking indicators are mixed, despite business confidence holding up (for now) and business conditions solid. There will however be offset from infrastructure expenditure in NSW and Victoria in particular, while initiatives to support the submarine industry will boost investment in SA and help offset the impact of imminent declines in car manufacturing.

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A snapshot of the outlook for each state and territory:

  • The New South Wales economy will remain one of the standouts, as the rebalancing back towards the non-mining sectors continues. Growth in state final demand has been supported by household consumption, a high level of dwelling investment and improved business investment, while services exports have been particularly robust. Infrastructure investment will also support NSW, although growth will ease somewhat as momentum from the housing sector and AUD depreciation begins to fade.
  • The broadening non-mining recovery is also benefiting Victoria, especially through the pick-up in the services sector. Strong employment and housing market growth are propping up household consumption and dwelling investment. Strong relative population growth and infrastructure spending will maintain economic growth at a healthy rate above the national average, although it will ease back slightly owing to reduced currency depreciation and slower growth in residential property construction.
  • Green shoots are emerging in South Australia, while recent policy announcements at the state and federal level aimed at promoting growth and jobs are encouraging. A limited industrial base and an ageing population will continue to constrain growth however, while the closure of a key car manufacturing plant is imminent.
  • The Australian Capital Territory economy has emerged from the recent fiscal tightening and large scale public sector job cuts. While ongoing pressure for fiscal consolidation will remain a risk, we expect moderate growth going forward and low unemployment.
  • In Queensland, real gross state product will grow solidly on the back of strong LNG exports and tourism. State final demand, however, will continue to contract as mining investment falls. In addition, income levels will remain subdued owing to lower commodity prices and a soft labour market. The economic transition post the mining boom is producing differing results across regions, industries and occupations. South-east Queensland with its larger population base and more diverse economy is outperforming, while mining regions are struggling.
  • In Western Australia, the evolution of the mining cycle continues to drive economic conditions. Lower commodity prices and falling mining investment are having a momentous impact, well beyond the mining sector itself. The true impact of these events have been somewhat masked by the offsetting impact from net export volumes, while domestic demand, nominal growth and incomes are very weak. These trends will continue given the lack of momentum in non-mining sectors.
  • The Tasmanian economic outlook has improved over the past year, although there is likely to be divergence in major industries: tourism continues to perform well, while farmgate price cuts will continue to put pressure on the state’s hitherto burgeoning dairy industry.
  • In the Northern Territory, the positive impact of the Icthys LNG project is tailing off and employment, wages, business investment and dwelling prices are starting to struggle. This will worsen upon project completion next year, although export volumes will boost GSP growth in 2017-18.