November 10, 2023
State Economic Update – Q3 2023
Growth holding up but subdued year ahead
- While growth has slowed in 2023, the state and territory economies have showed considerable resilience to the common impact of higher rates and inflation, with a range of factors supporting activity across the nation.
- Looking at State Final Demand (SFD) data, household consumption growth has been modest but remained positive in most jurisdictions through Q2, with retail sales data pointing to resilience through Q3 across the board. Strong population growth has supported demand in the large eastern states, with NSW and Victoria continuing to benefit from a strong rebound in overseas migration and Queensland also still benefiting from interstate movements.
- Public demand has also been a key support, with significant public investment programs in NSW, Victoria and Queensland as well as the Territories. Business investment has been more mixed despite business conditions remaining healthy across the states. The larger states have benefited from rising private investment but growth has been more subdued in the smaller jurisdictions. A large fall in resources-related activity in NT has been a key drag there alongside disruptions to LNG production.
- The strength of population growth has kept rental markets very tight across most capitals and seen house prices heading back towards their 2022 peaks in the larger cities – though prices in Hobart, Darwin and Canberra have been somewhat more subdued. The tight market has been exacerbated by supply challenges with dwelling investment flat or falling in most states (with WA a notable exception).
- The labour market also remains very tight across the board, although there are some signs the pace of employment growth is slowing. The unemployment rate remains at or below 4% in trend terms in most states, though it has been drifting higher in Queensland, SA, the NT and ACT. NAB expects gradual further loosening in the labour market as growth slows.
- Commodity prices have eased from their 2022 highs but remain elevated, supporting incomes in exporting states. Lingering concerns about the growth in China continue to cloud the outlook for iron ore exports, while the coming El Nino period is expected to see crop production decline, weighing on agricultural exports. Services exports have largely regained their pre-COVID levels in most states.
- Looking ahead, growth is expected to remain subdued into 2024 with inflation still elevated and interest rates remaining in restrictive territory – although some progress on inflation is expected, easing the drag on real incomes. The slowdown in domestic demand is likely to weigh more heavily in the smallest states, which are benefitting less from external factors like migration and commodity exports.
- Public demand will continue to play an important role, though this comes in the context of constrained state government budgets. Most forecast a return to operating balance, but this hinges on budget restraint which may limit the scope to support activity through a difficult period.
For further details please see State Economic Overview (Q3 2023)