Key Points

• With the rebound from COVID now firmly in the rearview mirror, the impact of high inflation and rising interest rates on households is increasingly weighing on economic growth across the states in 2023.
• The post-COVID rebound in 2022 should result in strong gross state product (GSP) growth in most states for 2022-23 overall. However, slowing consumption was evident in Q1 state final demand (SFD) and recent retail trade data suggests further slowing occurred in Q2. We expect the consumption slowdown to continue as rate impacts continue to flow through, and as such see well below-trend growth across the board for 2023-24.
• Under the surface, a range of important dynamics are at play. The rebound has supported very strong employment growth, and labour markets remain historically tight across the country, driving wage growth to over 4% in WA and Tasmania and over 3.5% elsewhere. Whether this remains the case as economic growth slows is a key question for the outlook, with some softening likely in most cases.
• At the same time, a rapid recovery in migration has put pressure on housing markets, driving up rents in most capitals and seeing dwelling prices begin to rise over recent months after rate rises caused a correction in late 2022 and early 2023. NSW and Victoria have seen the strongest population impacts and Sydney’s housing market is particularly tight, while for Queensland population growth is likely to slow as interstate flows normalise.
• The outlook for key exports it also clouded. The recovery in services exports has largely run its course, with international student enrolments back at or near pre-COVID levels in NSW, Victoria, Queensland and SA. The recovery in short-term visitor arrivals also appears to be slowing, albeit short of pre-COVID levels. In terms of commodities, the uncertain outlook for growth in China is a risk for iron ore demand– a key factor for WA’s economy – while the increasing likelihood of an El Nino event is weighing on the outlook for agricultural production across the states.
• The very different economic experiences of the past few years have delivered very different budget positions across state governments. The legacy of COVID has left the NSW and Victorian governments with significant deficits, while elevated commodity prices have delivered revenue windfalls for WA and Queensland. Temporary spending on cost-of-living relief has also been a common theme.
• Most state governments forecast a return to a broadly balanced net operating position over the coming years but slower than expected economic growth is a significant risk, alongside continued pressure to deliver services for rapidly growing populations.
• Moreover, most states have maintained significant public investment programs in health, transport and energy infrastructure which will see state government debt levels rise across almost all jurisdictions. Managing these large infrastructure programs and ensuring new projects are increasing the productive capacity of states’ economies will be an important priority going forward.

For further details please see State Economic Overview (June 2023)