Below trend growth to continue
COVID disruptions continue to fade while growth remains strong and labour markets are tight everywhere
The impacts of capital city lockdowns and state border closures continue to fade, but the lingering impacts of the pandemic in terms of inflation, migration and international travel continue to play out across the states.
Generally, economic growth has been strong across the country, even accounting for the impact of a rebound in activity as lockdowns fade. State final demand is now well above its pre-COVID level in every state. The rebound has been led by strength in household consumption but also supported by strong government spending. However, reflecting the lagged reopening in NSW and Vic, the two largest states rebounded more slowly than the others, while elevated commodity prices have also supported WA, NT and Qld.
Looking forward, we expect growth to slow across the states as the measured impacts of the rebound and closed borders fades, and high inflation and interest rate increases weigh on household budgets, slowing consumption. These forces are expected to have a broad impact across the states as is the ongoing rebalancing away from goods spending. Both dwelling and business investment are also expected to slow as the impact of pandemic-related stimulus fades.
The strong recovery in activity has also seen very strong labour demand across the states – with employment now well above pre-COVID levels in many states and labour markets now very tight. The unemployment rate has declined sharply across the states, with NSW and Vic around 1 ppt below their pre-COVID trends, while QLD, WA and SA have seen even larger falls of around 2 ppt. Job ads and vacancies data suggests labour demand remains strong across all states with close to one vacancy for every unemployed worker.
With global factors having been the key driver of recent inflation all states have seen increasing price pressures. Building costs have been a key part of this, with slightly stronger outcomes in WA and QLD boosting the capital city indexes in those states. Over time, many of the international factors will fade and state specific factors such as rents growth and the impact of faster wage growth will increase in importance.
Housing markets across the states are experiencing a large adjustment. House price falls have now broadened out across the states – driven by reductions in borrowing power. So far, the capitals most impacted by affordability constraints (Sydney and Melbourne) have fallen the most. While borrowing power has declined substantially, strong labour markets and very tight rental markets (and accelerating rents growth) are key offsets.
Population growth is showing early signs of a rebound after slowing to its slowest rate in 100 years while the international border was closed. All states saw significantly softer population growth but Q1 2022 data shows a solid rebound in overseas migration across the states Interstate migration trends will also be important as the pandemic-related dynamics unwind. WA, SA and the NT have also seen a boost with lower than usual interstate departures.
The impetus from the agriculture sector may have peaked – while estimates point to a good 2022-23 winter crop, they are down from 2021-22. Similarly, while rural commodity prices remain high, they have fallen in recent months.
While growth is expected to slow across the states, the NAB business survey suggests that business conditions have remained resilient everywhere, and that firms remain relatively optimistic. While this may fade as growth slows, capacity utilisation is also high across the states, and points to ongoing price pressures in the economy in the near term before the impact of higher rates feeds through the economy more fully.
The key risks for the state economies continue to evolve. Locally, the threat of lockdowns and border closures is firmly behind us, though overseas the COVID Zero approach in China (and property market fallout) poses a risk for global growth. Similarly, while the war in the Ukraine will provided a boost for energy exporting states in the near-term, energy prices have fallen back over recent months and the impact on global growth in the medium term will ultimately weigh on trade. Likewise, the global monetary tightening underway will serve to significantly slow global growth more broadly over the next two years.
For further details please see State Economic Overview (October 2022)
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