Broadening economic growth in Australia

Principal Economist's View 

With Christmas fast approaching, it seems an odd time to do a 2017/18 review. But unfortunately, that is how long it takes for the Australian Bureau of Statistics to produce the State National Accounts. With these accounts only released once a year, how are the states currently tracking?

A common perception is that New South Wales (NSW) and Victoria (VIC) are driving growth in the Australian economy, with the other states lagging behind. There is certainly some truth in this, particularly when examining labour market conditions. Trend employment growth has risen to 3.5% in NSW and 2.6% in VIC over the year to October. Across the rest of Australia, employment growth is averaging around a 1.3% pace. The unemployment rate has fallen to 4.4% in NSW and 4.5% in VIC, only just above their lows of 4.2% seen in early 2008. In contrast, the unemployment rate in Queensland (QLD) and Western Australia (WA) is 6.25% and 5.7% respectively, around three percentage points above their 2008 low. 

While the labour market conditions give us a good feel for the overall position of the state economies, the State National Accounts add more details on the economic momentum across the country. In a nutshell, the accounts suggest improving economic conditions are broadening beyond NSW and VIC.

In 2017/18, the ACT recorded the best growth in Australia, with real Gross State Product (GSP) rising 4.0%, outstripping the national average real GDP growth of 2.8%. Activity in the ACT has clearly been supported by an improving Commonwealth Budget position, which has underpinned strong growth in government consumption (+2.7%), public investment (13.9%) and helped boost consumer spending (3.6%).

VIC took out 2nd place, with real GSP rising 3.5% in 2017/18, down slightly from a 4% pace in the prior year. The performance of the Victorian economy remains very strong. Real state final demand expanded 4.7% in 2017/18, the equal best performance seen in 15 years, underpinned by strong consumer spending (+3.8%), firming business investment (+9.7%), significant public investment (+10.5%) and high government consumption (+5.5%). Not surprisingly, the public infrastructure boom is supporting the construction industry (+6.1%), while the rollout of the NDIS and the opening of new facilities has supported the health care and social assistance industry (+7.9%).

QLD made it back on to the podium, finishing 3rd, with real GSP growth improving from 2.0% in 2016/17 to 3.4% in 2017/18. This is the best performance in QLD since the mining investment boom in 2011/12 and significantly outstripped the State Government’s budget projections of 2.75%. The mining sector is no longer acting as a drag on the QLD economy, with increased mining activity (+3.4%) and higher commodity prices supporting government revenues and broader economic activity. The QLD economy is also benefitting from a rebound in private non-dwelling construction (+16.3%), which has helped see growth return to the construction industry (+5%). Government consumption has remained strong (+5.4%), household consumption has picked-up to a moderate pace (2.8% from 2.2%), while dwelling investment (-4.8%) has started to turn lower due to a downturn in the high-density apartment construction cycle. Across the industries, increased electricity production to meet strong demand from Southern States supported the utilities sector (+8.6%), while growth in health care (+5.5%) and administration and support services (+9.9%) remained strong.

TAS came in 4th spot, with real GSP growth rising strongly from 1.5% to 3.3%. TAS is benefitting from a rebound in population growth to its fastest pace in a decade, a housing market upswing, strong consumer spending (2.9%) and a sharp lift in business investment (+17.4%).

NSW came in 5th spot, with real GSP growth slowing from 3.1% in 2016/17 to 2.6% in 2017/18. State final demand remained strong (+3.4% unchanged), underpinned by robust consumer spending (+2.7%), a further ramp-up in public investment (+4.7%) and strong business investment (+10.9%). The moderation in GSP growth in 2017/18 was driven by a smaller contribution from what the ABS refers to as the “balancing item.” This mostly likely reflects increased interstate imports as the public infrastructure boom draws in additional resources from other states. In our view, the slowdown in growth in NSW in 2017/18 was not due to weaker domestic economic conditions, rather emerging local capacity constraints that forced businesses to source more inputs from interstate to meet strong demand conditions.

SA came in 6th spot, with real GSP growth slowing from 2.4% in 2016/17 to 2% in 2017/18. The slowdown was largely due to a drop in agricultural output (-12%) following a bumper wheat harvest in 2016/17. Conditions in WA improved markedly in 2017/18, with the economy emerging from recession as real GSP growth firmed from -1.8% in 2016/17 to 1.9% in 2017/18. The sharp improvement reflects diminishing mining headwinds, with business investment (0.1% from -28.6%) stabilising, household consumption picking-up (1.6% from 1%) and ongoing solid growth in international exports (+4.3% from +6.6%) due to increased LNG production. Mining activity (+2.8%) was solid in 2017/18, while the construction industry is starting to show signs of improvement (2.4% from -24%). Finally, growth in NT slowed from 2.7% to 1.7% in 2017/18. The NT economy experienced a big drop-off in business investment (-16%) as the Ichthys LNG project neared completion.  

Overall, we expect real GDP growth in Australia will remain around a 2.8% pace in 2018/19. While the housing price corrections in Sydney and Melbourne will prove a headwind over the coming year, large infrastructure booms and low unemployment should ensure robust growth continues in NSW and VIC. Furthermore, ongoing recovery in QLD and a further pick-up in WA should contribute to more balanced growth in Australia over 2018/19.

Table 1: Financial market movements, 8 – 15 November 2018

Equity index

Level

Change

10-yr government bond

Yield

Change

Foreign exchange

Rate

Change

S&P 500

2,730.2

-2.7%

US

3.11%

-12.7 bps

US Dollar Index (DXY)

96.93

0.2%

Nikkei 225

21,803.6

-3.0%

Japan

0.11%

-1.3 bps

USD-JPY

113.64

-0.4%

FTSE 100

7,038.0

-1.4%

UK

1.37%

-19.2 bps

GBP-USD

1.277

-2.2%

DAX

11,353.7

-1.5%

Germany

0.36%

-9.7 bps

EUR-USD

1.133

-0.3%

S&P/ASX 200

5,736.0

-3.2%

Australia

2.72%

-4.2 bps

AUD-USD

0.728

0.3%

Source: Bloomberg

 

For economic update by region, click here

About QIC

Investment Capabilities

Knowledge Centre

Latest News

About QIC