The COVID-19 pandemic has remained a source of disruption, although impacts remain relatively transitory. There was a strong recovery in the states affected by lockdowns in Q3 2021 (NSW, Vic., ACT). Similarly, the large fall in hours worked in January due to the large number of people isolating as a result of the Omicron wave was largely reversed in February in NSW, Vic., SA, Tas and Qld (but with a fall in WA as their wave started later).

Even with the ongoing disruptions, state final demand in Q4 2021, was clearly above its pre-COVID-19 level. With population growth weak, this has been accompanied by a tightening in labour markets across the country. Unemployment rates have been trending down and for all states/territories are at or below their pre-pandemic level. Job vacancies are elevated with business reporting it is difficult to find suitable labour.

Looking forward, we expect ongoing strength in overall consumption spending (albeit slightly disrupted in Q1 by Omicron and floods). Business investment as well as government spending should support growth in the near term, while trade is expected to be a small drag on growth. However, we do expect to see a rebalancing in goods and services spending, as well as a recovery in services trade (education and tourism).

Growth should be broad-based across the state and territories, albeit with some re-balancing back to NSW and Vic. whose recovery has been relatively sluggish so far. This should also lead to further falls in the unemployment rate, with the national unemployment rate expected to reach 3.5% by mid-2022.

The recovery in activity has also been accompanied by rising inflation pressures; this has been broad based but particularly so in Perth, Brisbane, Darwin and Hobart (with higher inflation broadly seen in areas with stronger growth over the pandemic). We expect these pressures to persist in the near-term taking the year-ended rate (nationally) to 3.7% by mid-year and for headline CPI inflation to 4.2% by Q3 2022 before easing. The lift in actual and expected inflation, alongside an increasingly tight labour market, leads us to expect that the RBA will start lifting the cash rate in August and this will be followed by further increases out to 2024.

This will have implications for housing markets across the country as it is one of the more interest sensitive sectors. Dwelling investment has come off its recent peaks in all states and building approvals (ex ACT) have been trending down. However, a large pipeline of work in most states should sustain a solid level of activity going forward. Dwelling price growth has started to slow although it remains strong in Brisbane, Adelaide and Hobart. We expect price growth to eventually turn negative across all the capital cities, with falls of around 10% to end-2023 nationally but with larger falls in Sydney & Melbourne.

For further details please see State Economic Overview (March 2022)