State Economic Handbook: October 2017

Economic growth in most states is expected to strengthen somewhat in 2017-18 before moderating a little in 2018-19 as dwelling investment and LNG exports peak.

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Overview:

  • The gradual non-mining recovery is becoming increasingly synchronised across the states and territories. Economic growth in most states is expected to strengthen somewhat in 2017-18 before moderating a little in 2018-19 as dwelling investment and LNG exports peak. The unemployment rate is forecast to decline in most states and territories with the exception of the ACT and the NT.
  • Victoria and New South Wales will remain ahead of the pack in terms of state final demand growth, as non-mining business investment, infrastructure spending and services spending support growth as dwelling construction peaks. However, Victoria is forecast to experience the strongest growth in Gross State Product (just!) in 2017-18, thanks to faster population growth, despite the closure of key automotive manufacturing plants this year. Queensland and WA will also experience very strong growth in 2017-18 in particular as exports surge. NSW however will see a lower rate of unemployment, bettered only by the NT and the ACT (although unemployment is forecast to rise in both territories).
  • LNG exports will add significantly to growth in both Queensland and Western Australia, especially in 2017-18. There are also signs of stabilisation in WA as mining projects reach completion, although a pick up towards solid domestic demand growth remains someway off. Domestic demand in Queensland meanwhile has rebounded strongly, although will slow somewhat now that the 3 large LNG projects have completed construction and support from dwelling investment starts to wane.
  • Not only has the recovery in growth broadened across the states, it has also broadened across industries in most jurisdictions. This is particularly the case in NSW and Victoria, but also in South Australia where state final demand and business conditions have rebounded strongly. Tasmania and South Australia now boast the strongest business conditions.
  • The outlook for investment has improved the most for NSW and Victoria, with private capex expectations higher for 2017-18. Government infrastructure spending is also running at record levels in NSW, Victoria and SA, although will add less to growth from 2018-19 based on the current pipeline.
  • Consumer spending is outpacing household income growth across all states and territories, as wages growth remains weak across the country, suggesting that households are dipping into their savings to fund spending (with the notable exception of Tasmania). With wages growth to pickup only gradually, we expect only gradual acceleration in consumer spending growth in most states, despite the widespread pick up in employment growth. Consumer spending is strongest in the NT, but likely to weaken there as population growth slows as the Icthys LNG project is completed. Meanwhile, high household debt levels will also be cause for consumer caution, particularly in the largest south-eastern states.
  • Tourism spending (both domestic and international) and education exports will continue to expand in most states, particularly if our forecasts for renewed AUD depreciation prove correct.
  • After shooting the lights out in 2016, agricultural conditions are likely to be much more challenging this year. Parts of NSW and Queensland have seen record breaking temperatures in close proximity to frosts, while southern WA, and more recently south-east Queensland, have seen soaking rains. We have again cut our wheat production forecast to 18.7 million tonnes – the lowest in a decade.

A snapshot of the outlook for each state and territory is available in our States Overview document. Links to individual handbooks for each state and territory are included below.

  • We are relatively upbeat about the outlook for New South Wales, despite recent surprise slowing in state final demand. Business investment should rebound somewhat, bolstered by a combination of solid business conditions, and public infrastructure spending is at record levels, which will help to offset the shrinking contribution (and eventual headwinds) that is likely to come from dwelling investment as the construction cycle approaches its peak. After leading the pack in terms of state final demand in recent years however, NSW is likely to be overtaken by Victoria.
  • Victoria will be the key standout across the states in 2017-18, thanks to strong population growth (particularly from overseas migration) and a positive outlook for business and government investment which will help offset headwinds from declining auto manufacturing and peaking dwelling construction (although stronger than expected demand will support housing prices). Strong jobs growth should continue to support consumer spending, as will tourism, although low wages and productivity growth will be headwinds.
  • South Australia is experiencing a cyclical recovery, with infrastructure spending, international education and tourism, and manufacturing (outside of auto and steel, including wine) performing well. There are some key challenges ahead however, including the closure of auto manufacturing, and a peak in dwelling construction and infrastructure investment, although the National Shipbuilding Plan will provide a welcome boost in coming years.
  • The Australian Capital Territory economy will continue to expand at a healthy pace, albeit more moderately than in the past few years, while the unemployment rate is forecast to remain below the national average.
  • Queensland continues to transition post the resources investment boom towards more broad-based economic growth. However while the labour market has strengthened, the economy remains prone to external shocks such as weather and global demand changes. Growth is forecast to pick up in 2017-18 as exports surge – to almost rival Victoria – and then moderate in 2018-19 as the contribution from LNG exports and dwelling construction flatten off while the domestic economy slowly recovers.
  • The headwinds from the mining sector continue to be felt across Western Australia. While there are some encouraging signs that the worst has passed, many economic indicators have stabilised, and there are tentative signs of improvement in non-mining business investment, it will likely take quite some time before domestic demand can rebound. Overall, while economic growth will pick up from here, this is largely due to a very large contribution from LNG exports.
  • Tasmania continues to experience rapid rates of state final demand, as well as strong tourism and agriculture growth. The unemployment rate however remains elevated, much of the growth has been concentrated in southern Tasmania and demographic challenges remain. Noting that agricultural production will come under pressure, real GSP growth is expected to be higher in 2017-18, but will remain below the national average.
  • The Northern Territory, economy has surprised on the upside, although the approaching completion of the Icthys LNG project will likely see downward pressure on population growth, the labour market, domestic demand and the housing market, despite exports driving above-national growth in GSP.

For further details, please see the attached State Overview.