july 2014 commbank - state of the states

State of the States July 2014 State & territory economic performance report. Executive Summary

Craig James, Chief Economist

NATIONAL LEVEL INSIGHT

How are Australia’s states and territories performing? Each quarter CommSec attempts to find out by analysing eight key indicators: economic growth; retail spending; equipment investment; unemployment; construction work done; population growth; housing finance and dwelling commencements.

Just as the Reserve Bank uses long-term averages to determine the level of “normal” interest rates; we have done the same with key economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.

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There has been no change in the rankings of States and Territories on the economic performance table.

There are basically three groups. Western Australia remains Australia’s best performing economy from the NorthernTerritory and NSW. The next grouping is Queensland, Victoria and the ACT. And the final grouping is South Australia andTasmania.

Western Australia leads the way on retail trade and housing finance. The Northern Territory leads the way on economic growth, business investment, unemployment and constructionwork. And NSW is strongest on population growth and dwelling starts.

State of the States July 2014

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Apart from top rankings on retail trade and housing finance, Western Australia is number two on economic growth and construction work done and third on business investment, population growth and dwelling starts.

Northern Territory is second ranked on retail trade but is also the weakest on housing finance, preventing the territory from taking top spot on the rankings from Western Australia.

New South Wales remains third ranked with momentum provided by home building. However it remains middle-ranked on most economic indicators.

There is little to separate Queensland, Victoria and the ACT on the economic performance rankings.

The key strength in the Queensland economy is equipment investment but lags on population growth (compared with its “normal’ or decade average).

In contrast Victoria continues to record solid population growth compared with its decade average, thus sustaining home purchase and construction. But commercial and engineering activity is relatively weak compared with other states and territories.

The ACT economy is supported by low unemployment and solid home building. But it is weakest on equipment investment suggesting there is scope for government spending and incentives for private business.

There is still a sizeable gap in the rankings to South Australia and Tasmania. South Australia is generally ranked sixth to eighth on the key indicators but is losing momentum due to a weak job market.

Tasmania remains at the bottom of the Australian economic performance table. Tasmania is seventh or eighth on the economic indicators although it currently has the strongest annual growth rate on retail spending of the eight states and territories.

Methodology

Each of the states and territory economies were assessed on eight key indicators: economic growth; retail spending; equipment investment; unemployment, construction work done; population growth; housing finance and dwelling commencements.

The aim was to find how each economy was performing compared with “normal”. And just like the Reserve Bank does with interest rates, we used decade-averages to judge the “normal” state of affairs. For each economy, the latest level of the indicator – such as retail spending or economic growth – was compared with the decade average.

While we also looked at the current pace of growth to look at economic momentum, it may yield perverse results to judge performance. For instance retail spending may be up sharply on a year ago but from depressed levels. Overall spending may still be well below “normal”. And clearly some states such as Queensland and Western Australia consistently have faster economic growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered ‘normal’ for that state or territory.

For instance, the trend jobless rate in the ACT of 3.6 per cent is lower than all economies. But this jobless rate is up 5.5 per cent on its ‘normal’ or decade-average rate of 3.4 per cent, whereas the jobless rate in Northern Territory is just over 9 per cent below its decade-average level.

Trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

ECONOMIC GROWTH

Ideally gross state product (GSP) would be used to assess broad economic growth. But the data isn’t available quarterly. And up to the December quarter we used state final demand (household and business spending) and exports less imports to act as a proxy for GSP. But the Bureau of Statistics has ceased calculation of state trade data in real terms. So now we will use state final demand to assess “economic growth” – certainly not an optimal situation.

The Northern Territory continues to lead the rankings on economic activity. Activity in the ‘top end’ is almost 36 per cent above its ‘normal’ or decade-average level of output.

Next strongest is Western Australia, with output around 25 per cent higher than the decade average level of output. Then follows Queensland (up 15.5 per cent) from NSW (up 13.2 per cent).

At the other end of the scale, economic activity in Tasmania in the March quarter was just 4.5 per cent above its decade average while South Australian activity was up almost 8 per cent on its "normal" or average output over the past decade.

NSW has the fastest annual economic growth rate in the nation, up by 4.0 per cent on a year ago, ahead of the Northern Territory with 3.4 per cent and Tasmania (2.3 per cent). However the “true” situation – once trade is added to domestic spending would reveal that the Northern Territory and Queensland have the strongest growth rates in the nation.

The weakest state final demand annual rates are in Western Australia (-2.3 per cent) followed by Queensland and the ACT (both down 0.5 per cent on a year ago).

“The Northern Territory continues to lead the rankings on economic activity. Activity in the ‘top end’ is almost 36 per cent above its ‘normal’ or decade-average level of output.”


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RETAIL SPENDING

The measure used was real (inflation-adjusted) retail trade in trend terms with March quarter data the latest available.

Western Australia retains top spot on the retail rankings with spending in the March quarter 19 per cent above decade average levels. Solid population growth together with firm turnover of existing homes and stronger home building underpin the relative strength in consumer spending.

Northern Territory was next strongest, supported by lower-than-normal unemployment, with spending 18.1 per cent above decade-average levels.

Queensland was next strongest, with spending 14.8 per cent above decade averages, followed by NSW (up 14.4 per cent).

South Australia now has the weakest result on retail spending, up just 5.5 per cent on the decade average and below Tasmania with growth of 6.3 per cent.

If monthly retail trade was assessed instead to calculate the rankings (May data available), NSW and Queensland would swap positions and ACT and Tasmania would swap positions in sixth and seventh.

In terms of annual retail trade, encouragingly in May Tasmanian spending was 8.9 per cent higher than a year ago, ahead of NSW with 8.3 per cent growth, At the other end of the scale, ACT spending was down by 1.9 per cent on a year ago with Western Australian spending up by just 0.2 per cent.

“Western Australia retains top spot on the retail rankings with spending in the March quarter 19 per cent above decade-average levels.”

EQUIPMENT INVESTMENT

Northern Territory continues to lead other states and territories when it comes to equipment investment extending its gap over next-placed Queensland. Spending in the March quarter was 35.5 per cent above “normal” – or decade-average levels.

Mining investment still remained relatively firm across the resource states. Equipment investment in Queensland is now 6.3 per cent above decade-average levels followed by Western Australia (up 5.8 per cent) and NSW (up 3.9 per cent).

By contrast, new equipment spending in the ACT was 17.1 per cent below its longer-term average in the March quarter with Tasmania down 8.7 per cent.

Equipment spending is also below decade-average levels in South Australia (down 8.4 per cent) and Victoria (down 5.1 per cent).

On a shorter-run analysis, equipment investment in the March quarter was lower than a year ago in all of the state and territory economies except Northern Territory (up 46.3 per cent) and Tasmania (up 4.1 per cent)..

Equipment investment is down the most on a year ago in the ACT (down 36.6 per cent), followed by Western Australia (down 24.2 per cent). By contrast new equipment investment in NSW was down by just 2.5 per cent and was down by 7.3 per cent in Victoria and down by 9.1 per cent in South Australia.

“On a shorter-run analysis, equipment investment in the March quarter was lower than a year ago in all of the state and territory economies except Northern Territory (up 46.3 per cent) and Tasmania (up 4.1 per cent).”


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UNEMPLOYMENT

The Northern Territory and the ACT have arguably the

strongest job markets in the nation. Northern Territory has the second lowest trend unemployment rate in the nation at 3.9 per cent, but this jobless rate is actually over 9 per cent below its “normal” or decade average level of 4.3 per cent.

Similarly in the ACT, trend unemployment is the lowest in the nation at 3.6 per cent and this rate is just 5.5 per cent above its “normal” or decade average rate level.

In other states, the latest unemployment rates are all above their decade-average levels. In NSW, unemployment stands at 5.6 per cent, up almost 7 per cent on its normal” or decade-average level of 5.2 per cent.

At the other end of the scale, South Australia’s 7.0 per cent jobless rate is up almost 29 per cent on the decade average level of 5.4 per cent.

Next weakest is Tasmania where its 7.4 per cent jobless rate is just over 24 per cent above the decade-average level. Next weakest is Queensland with its 6.3 per cent jobless rate almost 22 per cent above its decade-average level.

“The Northern Territory and the ACT have arguably the strongest job markets in the nation.”

“At the other end of the scale, South Australia’s 7.0 per cent jobless rate is up almost 29 per cent on the decade average level of 5.4 per cent.”

CONSTRUCTION WORK

The measure used for analysis was the total amount of

residential, commercial and engineering work actually completed in trend terms in the March quarter.

In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest state (Tasmania).

In Tasmania, overall new construction work completed is 7.8 per cent below its decade average. By contrast construction work done in Northern Territory was over 97 per cent above its decade average followed by Western Australia (up 54.2 per cent) and Queensland (up 45.9 per cent).

Next weakest to Tasmania is the ACT where construction work is 2.8 per cent above decade averages, followed by Victoria (up 9.7 per cent on the decade average).

In terms of annual growth rates, Northern Territory construction work done in the March quarter was up 17.5 per cent on a year ago, followed by Queensland (up 6.4 per cent) and Western Australia (up 1.4 per cent). But at the other end of the scale, ACT construction work was 12.5 per cent down on a year ago.

“In all states/territories except Tasmania construction work is higher than decade averages. And there remains a large gap between the strongest states (the resource states) and weakest states (Tasmania).”


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POPULATION GROWTH

To assess population performance we looked at the current annual growth rate and compared it with each economy’s decade-average growth pace.

And there is mixed news with population growth above ‘normal’ in four states or territories and growth has lifted in only three economies over the past quarter.

Western Australia is the clear leader in population growth with an annual growth rate of 2.88 per cent. But while NSW has a lower growth rate at 1.50 per cent, this is 30.8 per cent above the decade average. Western Australia’s population growth is 10.7 per cent above the decade average – third strongest.

Victoria is second strongest in annual population growth as well as the differential with the decade average rate. Victoria’s population is 1.90 per cent higher than a year ago and this growth rate is 14.6 per cent higher than the “normal” or decade-average level.

At the other end of the leader-board is Tasmania where the annual population growth of 0.30 per cent was 56.3 per cent below the decade average rate of 0.69 per cent but annual growth is the strongest in two years.

In the Northern Territory annual population growth is near two-year lows at 1.69 per cent and down almost 7 per cent on the decade average.

“Victoria is second strongest in annual population growth as well as the differential with the decade average rate.”

HOUSING FINANCE

The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory.

Housing finance is not just a lead indicator for real estate activity and housing construction but also is a useful indicator of activity in the financial sector. It would be useful to compare figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.

In four of the states and territories – Western Australia, Victoria, NSW and the ACT – trend housing finance commitments are above decade averages. Even more encouragingly, commitments in May were above year-ago levels in all states and territories.

Western Australia remains in top spot for housing finance, with the number of commitments almost10 per cent above the long-term average. Next strongest was Victoria, up almost 6 per cent on the decade-average.

The ACT is now in third spot on housing finance, up 4.2 per cent on the decade average followed by NSW (up 3.5 per cent).

Northern Territory remains the weakest economy for housing finance with trend commitments 17.5 per cent lower than its decade average. Next weakest was Tasmania with trend commitments down 14.1 per cent on the decade average, but encouragingly commitments were up 13.4 per cent on a year ago.

“Western Australia remains in top spot for housing finance, with the number of commitments almost 10 per cent above the long-term average.”


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DWELLING STARTS

The measure used was the trend number of dwelling commencements (starts) with the comparison made to the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However any over-building or under-building in previous years can affect the current level of starts.

The outlook for housing construction continues to strengthen, underpinned by low interest rates and strong demand by investors. Dwelling starts are above decade averages in seven of the states and territories and starts in six states and territories are above levels of a year ago.

NSW remains the strongest in the nation for new home construction, with starts almost 45 per cent above decade averages. In addition in the March quarter the number of dwellings started was 19.6 per cent higher than a year earlier.

In second spot was the ACT, with starts over 32 per cent above decade averages followed by Western Australia with starts up almost 30 per cent on decade averages and Northern Territory, up 15.6 per cent.

At the other end of the scale, Tasmanian dwelling starts were 35.4 per cent below decade averages, while starts in the March quarter were 2.5 per cent down on a year earlier. Next weakest was South Australia (up 1.3 per cent on the decade average), Queensland (up 6.3 per cent) and Victoria (up 15.5 per cent).

However encouragingly Queensland starts were 26.2 per cent higher than a year ago with South Australian starts up 24.2 per cent and Western Australian starts up 18.2 per cent.

“NSW remains the strongest in the nation for new home construction, with starts almost 45 per cent above decade averages”

OTHER INDICATORS

Real wages were positive in just one of the eight state and territory economies in the March quarter compared with three in the December quarter and seven economies in the September quarter. In South Australia wage growth was 0.3 percentage points above consumer prices.

Even using “underlying” inflation than “headline” inflation, real wages were either flat or slightly negative in most economies, putting pressure on retail spending. Only the ACT may have joined South Australia with real wage growth.

But for home owners and buyers, home prices are higher than a year ago in all capital cities, boosting wealth levels. Strongest growth in home prices was in Sydney (up 15.4 per cent) followed by Melbourne (up 9.4 per cent).

At the other end of the scale, home prices in Hobart are up 2.5 per cent on a year ago while in Adelaide and Canberra prices are up 2.9 per cent.

“Real wages were positive in just one of the eight state and territory economies in the March quarter compared with three in the December quarter and seven economies in the September quarter.”

“But for home owners and buyers, home prices are higher than a year ago in all capital cities, boosting wealth levels.”


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STATE BY STATE BREAKDOWN

Western Australia

“Western Australia remains Australia’s best performing economy…”

Northern Territory

“The Northern Territory leads the way on economic growth, business investment, unemployment and construction work.”

NSW

“NSW remains third ranked with momentum provided by home building. However it remains middle-ranked on most economic indicators.”

Queensland

“The key strength in the Queensland economy is equipment investment but lags on population growth (compared with its “normal’ or decade average).”

Victoria

“…Victoria continues to record solid population growth compared with its decade average, thus sustaining home purchase and construction.”

ACT

“The ACT economy is supported by low unemployment and solid home building.”

South Australia

“South Australia is generally ranked sixth to eighth on the key indicators but is losing momentum due to a weak job market.”

Tasmania

“Tasmania is seventh or eighth on the economic indicators although it currently has the strongest annual growth rate on retail spending of the eight states and territories.”

IMPLICATIONS AND OUTLOOK

While the baton is being passed from mining construction to mining production and home building, the resource states are still leading the way in the economic performance rankings.

While the expectation was that Western Australia would slip down the economic rankings, solid population growth underpins home building. So Western Australia still leads the performance rankings on two of the indicators and is second or third on five other indicators.

The Northern Territory economy remains close to Western Australia. But population growth lags other states and territories and that is checking activity in home purchase and construction.

The NSW economy certainly has momentum, especially in terms of population growth and therefore home building. NSW is also still “playing catch-up” after under-building for a number of years. So demand for homes is still above supply.

In Queensland the soft job market and relative under-performance on population growth are acting to constrain a broad-based lift in the economy.

Relatively high unemployment is also serving to cap growth in the Victorian economy although high population growth is underpinning home building.

The outlook for the ACT economy hasn’t changed from the assessment provided three months ago. Low unemployment is a clear strength for the ACT economy but weak confidence is constraining retail and business spending and future economic performance.

South Australia is lacking a growth driver, especially as a number of public sector construction projects have been completed or are nearing completion. The South Australian unemployment rate was the highest in the nation in June.

There are some encouraging signs in Tasmania including economy-leading retail trade growth and trend improvement in the jobless rate.

5.2%

5.7%

2.9%

7.0%

15.4%

9.4%

2.9%

2.5%

State of the States www.investing.commsec.com.au/stateofstates

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CONTACTS

Craig James Chief Economist (612) 9118 1806 [email protected] Twitter: @CommSec

Savanth Sebastian Economist (612) 9118 1805 [email protected] Twitter: @CommSec

july 2014 commbank - state of the states

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