State Economic Update -Sep 2013.pdf

7/29/2019 State Economic Update -Sep 2013.pdf

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@2012 National Australia Bank Limited ABN 12 004 044 937

State Economic Update September 2013NSW

TheNewSouthWaleseconomyhasperformedwellrelativetomoststatesoverthepastsixmonths,withitsdiversified

industrystructure

helping

to

cushion

the

economy

from

the

mining

investment

slowdown.

With

New

South

Wales

householdsmoresensitivetointerestrates,lowerinterestratesshouldsupporthouseholdconsumption,afasterhousing

recovery and a gradual improvement in nonmining business investment growth. The recent depreciation of the

Australiandollar(AUD)shouldsupportactivityintradeexposedsectors.Ofcourse,theNewSouthWaleseconomyisnot

entirely immune to the slowdown inmining investment,but the transition towards exportsgrowth shouldprovide a

boosttogrossstateproduct(GSP)from201415.TheNewSouthWaleseconomyshouldgraduallystrengthenasdemand

fromresourceintensivestatesimprovesandtheupswinginhousinginvestmentbecomesmoreentrenched.

Victoria

TheVictorianeconomyhasadiversified(largelynonmining)industrystructure,makingitmorestablethanmanyofthe

otherstates.Lower interestratesandimprovedconsumersentimentareexpectedtounderpinhouseholdconsumption

growth,whilepartialdatasuggestfurtherimprovementinpropertymarketconditions.Victoriashouldalsobenefitfrom

increasednet interstate trade,whileaweakerAUD should support strongerexports.While thereare severalareasof

potentialgrowth,

there

remain

anumber

of

inherent

weaknesses

in

the

Victorian

economy.

Fiscal

consolidation

will

continue to restraingovernment spendingand investment for some time.Victoriaalsohasa relatively large shareof

industries facing challenging conditions, including manufacturing, retail and wholesale trade. The Victorian outlook

appearsrelativelystable,althoughgrowthisexpectedtoremainbelowtrendovertheforecasthorizon.

Queensland

Queenslandhasbenefitedgreatlyfromtherapidsurge inmining investmentthat,upuntilrecently,wasgrowingatan

exceptionallyhighspeed.WhilethestrengthinmininghasstrengthenedtheQueenslandeconomyrelativetotheother

states, the nonmining sector continues to struggle, not helped by exTropical CycloneOswald in early 2013.While

dwelling investment is recovering, helped by lower interest rates and faster netmigration, theQueensland housing

markethasgenerallyunderperformed.ThisinpartreflectstherelativecautiousnessofQueenslandconsumers,withthe

highAUDandstillsoftglobalgrowthweighingheavilyontradeexposedandlabourintensivesectors.Lookingahead,a

downturn

in

business

investment

is

expected

to

be

negative

for

Queenslands

growth,

but

stronger

household

consumption and dwelling investment growth should help to offset this. While a lower AUD should assist growth,

weaknessinlabourintensivepartsofthestatemaykeeptheunemploymentrateelevatedforsometime.

WesternAustralia

The swelling inmining investmenthasbeen an enormous support to theWesternAustralian economy,withgrowth

spilling intootherpartsofthestateandotherstates.ButthishasmadeWesternAustraliahighlyvulnerabletomining

industry conditions. The mining boom brought with it increased population growth, which has boosted dwelling

investment and household consumption,with the latter alsobenefiting from the highAUD via increasedpurchasing

power.Asmininginvestmentunwinds,sotoowillgrowth.Giventhelabourintensityofmininginvestment,employment

growth is expected to slow. This is likely to put increased pressure on the domestic economy,with housingmarket

activityexpectedtostabilise,andtheeasinginincomeandpopulationgrowthexpectedtolimitdemand.

SouthAustralia

Growthin

the

South

Australian

economy

moderated

over

2012

13,

with

consumer

spending

and

housing

demand

remainingsubdued.SectorsexposedtothehighAUDcontinuetofacechallenges,thoughtheyshouldbesupportedby

the recent dollar depreciation. Nonspecialised parts of the manufacturing sector have faced especially difficult

conditions, includingmotorvehiclemanufacturingandassociatedsupplyfirms,whichwillhave implicationsforfurther

growth.Anetoutflowofmigrationwillkeep labourmarketconditionsreasonablysubdued.Overtime,the risingAsian

middleclasswillincreaseworlddemandforhighqualityfoodandwine,whichshouldbesupportiveforSouthAustralia.

Tasmania

TheTasmanianeconomycontinuedtounderperformrelativetotherestofAustralia,withstatefinaldemandcontracting

by2.9% in201213.WithTasmaniastrugglingto remaincompetitive inthemainlandandoverseasmarketsand lower

populationgrowthpresentingongoingproblemsfor itshouseholdsector,thereappearstobe littleupsidetothenear

termoutlook forthisstate.Nonetheless,therecentdollardepreciationshouldprovidesome relieftotradedependent

sectors,and

there

will

be

opportunities

for

investment

in

dairy

and

agriculture

sectors

over

coming

years.

Government

revenuepressureswillkeeppublicspendingrestrainedovertheforecasthorizon,contributingtothereasonablysubdued

outlookforgrowthin201314.


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StateForecasts

12/13 13/14f 14/15f 12/13 13/14f 14/15f

NSW 2.3 2.5 2.9 5.2 6.0 6.4

VIC 1.5 2.3 2.8 5.6 6.1 6.6QLD 3.8 1.8 2.6 6.0 6.3 7.2

SA 1.8 1.0 2.0 5.8 7.0 7.5

WA 5.0 2.8 2.5 4.4 5.5 6.6

TAS 1.3 0.5 1.3 7.3 8.5 9.5

Australia 2.9 2.2 2.8 5.3 6.2 6.8

Source:NABEconomics

GrossStateProduct UnemploymentRate

Annual%change Averageannualrate

Stateconditionscontinuetodisappointespeciallyinminingstateswhereinvestmentslowdownistakingatoll

TheNABQuarterlyBusinessSurveyshowedamarginaldeterioration inoverallbusinessconditions intheJunequarter,

withthe

level

remaining

close

to

four

year

lows.

While

all

states

experienced

difficult

conditions

in

the

quarter,

there

has

beenapronouncedslowing inactivity intheresourcerichstatesoverthepastyearorsowhere it isapparentthatthe

miningslowdown isspreadingbeyond thatsector.Asa result,WesternAustralian,Queenslandand toa lesserextent

SouthAustraliawillfacemorestructuralheadwindsthanelsewhere.Whileconditions inNewSouthWalesandVictoria

have remained subdued,activityherehas largely stabilisedasa resultof thesestatesbeingmorediversifiedand less

exposedtothemininginvestmentslowdown.Overtime,thestructuraldiversityoftheindustrymakeupinthesestates

canbeexpectedtosupportstrongergrowth.

More recent monthly data show that business conditions in the mining states have weakened into the September

quarter,whileconditionsinthenonminingstateshaveheldupatrelativelybetterlevels.Theweaknessinactivityinthe

mining states is consistentwith falling commodityprices and softerChinesedemand.While conditions aregenerally

weakacrossallindustries,activityintherecreation&personalservicesandfinance/business/propertysectorshasheld

upbetter

than

it

has

elsewhere,

supporting

activity

in

NSW

and

Victoria,

where

these

industries

comprise

alarger

share

ofstateoutput. Furthermore,aweakerAUD,risingequitypricesand lower interestratesmaybeprovidingmoreofa

boosttoactivityinthesestates.Consistentwiththegeneraldeteriorationinstateconditionsintothesecondhalfofthis

year,businessconfidenceappearstohaveweakenedeverywhere,withtheheaviestdeclinesintheminingstates.Partof

thedeterioration insentiment is likely to reflectexternal factors, includingexpectationsaroundwhen theUSFedwill

begintaperingitsassetpurchaseprogram,aslowinginChinesegrowthandatemporaryhiccupintheequitypricerally.

However,abounceinbusinessconfidencereported inthe latestAugustmonthlysurvey,whichappearstohave largely

reflected an expectation of political change andmore certainty about the future policy framework (this surveywas

conducted prior to the Federal election on 7 September), represents a decoupling of confidence from conditions,

althoughconsumerconfidencehasalsoimproved.

Graph 1

-40

-30

-20

-10

0

10

20

30

2004 2007 2010 2005 2008 2011

-40

-30

-20

-10

0

10

20

30

Quarterly NAB Business Conditions IndexNet Balance; deviation from LR national average*

* Deviation fromnational average since Sep 1989. Data are seasonally adjusted. Dots representAugust 2013 outcomes fromNAB monthly business survey.

** Data have been trended using 5-termHenderson trend (due to small sample size)

Net

bal

Net

bal

Queensland

NSW

Victoria WA

SA

Tasmania**

Graph 2

-40

-30

-20

-10

0

10

20

2004 2007 2010 2005 2008 2011

-40

-30

-20

-10

0

10

20

Quarterly NAB Business Confidence IndexNet Balance; deviation from LR national average*

Net

bal

Net

bal

QueenslandNSW

Victoria

WA

SA

Tasmania**

* Deviation fromnational average since Sep 1989. Data are seasonally adjusted. Dots representAugust 2013 outcomes fromNAB monthly business survey.

** Data have been trended using 5-termHenderson trend (due to small sample size)


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Weaknessinhouseholdspendingpersistsacrossallstates,withgrowthfallingsharplyinpreviousstrongperformers

Domestic finaldemandgrowth inAustralia softened from6.0%over201112 to 0.6%over 201213, representing the

weakestoutcomesince2009.Contributingtotherecentsofteningindemandhasbeenadeclineininvestmentgrowthas

wellas softgrowth inprivateconsumptionexpenditure,with the lattermakingupalmost55%of total finaldemand.

Throughtheyeargrowthinhouseholdfinalconsumptionexpenditurehasfallensignificantly(fromanexceptionalpace)

inWesternAustraliaoverthefirsthalfofthisyear,while in levelstermsgrowthwasparticularlyweak inTasmaniaand

SouthAustralia.Elsewhere,growthwasrelativelysoftcomparedtoayearearlier.

Graph 3

-10

-5

0

5

10

15

2004 2007 2010 2007 2010

-10

-5

0

5

10

15

Real State Final DemandYear-ended percentage change

Sources: ABS; NAB

% %

Queensland

NSW

Victoria

WA

SA

Tasmania

Graph 4

0

5

10

15

20

25

1990 1994 1998 2002 2006 2010 1991 1995 1999 2003 2007 2011

0

5

10

15

20

25

Household Savings*Proportion of gross disposable income

* Includes consumption of fixed capital

Sources: ABS; NAB

% %

QueenslandNSW

Victoria

WA

SA

Tasmania

Consumercautionhas remainedaprominentfeatureoftheAustralianeconomysincetheonsetoftheglobal financial

crisis(GFC),whenhouseholdsreassessedtheirspendingbehavioursinordertohelpdeleveragetheirbalancesheets.As

aresulthouseholdsarenowsavingamuchlargerproportionoftheirdisposableincomethantheywerepriortotheGFC,

and it isclear that thishasweighedheavilyonconsumption.While interest rateshave fallensince late2011, ineffect

loweringtherateofreturnavailabletohouseholdsontheirsavings,thisdoesnotappeartohavediscouragedhouseholds

from continuing to save. The general expectation is for the economy to soften as the transition away frommining

investmentintensifies.Morecertaintyabouttheeconomicoutlookmaybeexpectedtoseehouseholdsrelaxtheirsavings

patterns,

which

could

help

to

strengthen

household

consumption

growth.

The

rise

in

household

saving

as

a

proportion

of

disposableincomehasbeenbroadbasedacrossstates,thoughithasbeenparticularlypronouncedinWesternAustralia,

wherehouseholdincomegrowthhasrunwellaheadofconsumerspending,despitethestrengthofthelatter(seebelow).

Theanticipated slowing in theWesternAustraliaeconomycombinedwithamoreelevated levelofhousepricesmay

weighontherateofhouseholdsavingshere.

Graph 5

-4

0

4

8

2005 2008 2011 2005 2008 2011

-4

0

4

8

Real Household Final Consumption ExpenditureYear-ended percentage change

Sources: ABS; NAB

% %

Queensland

NSW

Victoria

WA

SA

Tasmania

Graph 6

-3

0

3

6

9

12

2004 2007 2010 2013 2006 2009 2012

-3

0

3

6

9

12

Retail Sales GrowthAnnual average percentage change

Source: ABS

% %

Queensland

NSW

Victoria

WA

SA

Tasmania

The relative strengthofeach economy tends tobea strongdeterminantof consumptionbehaviours, including retail

spending.Householdconsumptionexpenditureandretailsalesgrowth inWesternAustraliahavesurpassedthatofthe

otherstates

for

most

of

the

post

GFC

period

but

arecent

sharp

slowing

in

the

pace

of

growth

has

brought

consumption

spending inWestern Australia back to the pack (annual consumption growth slowed to 2% in June quarter 2013,

compared togrowthof6%oneyearearlier).Consistentwith this slowingand the sharpdeterioration in state final

demandasaresultoftheminingdownturn, it is likelythatthehouseholdsavingsratiohasfallen inthisstateoverthe


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pastyear(currentdataonlyavailabletoJune2012).Elsewhere,householdconsumptiongrowthhasgenerallysoftened

but toa lesserdegree.Households inNewSouthWalesappearmoresensitive to interest rates than theotherstates,

whichappeartohavehelpedtosupportamorestablepaceofhouseholdspendinggrowthoverrecentquarters.Thelevel

ofgrowthhasheldup relativelywell inQueensland,possibly reflecting temporary factors including repairs following

severeweatherconditionsearlierthisyear.However,thepaceofgrowthhasstillfallennotably,probablyreflectingthe

overall softness in labour market conditions and income growth. Tasmania has experienced the weakest growth in

household consumption,and indeed consumptionwasdeclining formostof 201112; this largely reflects the relative

weakness in theTasmanianeconomycompared to theother statesasa resultof lowerpopulationgrowthand falling

employment.Retail

sales,

which

account

for

approximately

one

third

of

total

household

consumption

expenditure,

have

exhibitedsimilartrendstoconsumptiongrowthacrossthestates.

PublicsectorinvestmentfallingasGovernmentsaimtobalancetheirBudgets

WithfiscalconsolidationaprimaryfocusatpresentandCommonwealthandStateGovernmentsintentonbringingtheir

Budgetbalancesintosurplus,publicsectordemandgrowthisbeingheavilyconstrained.Publiccapitalinvestmentacross

thestatesdeclinedsignificantlyover201213asCommonwealthfiscalspendingoninfrastructurewasunwoundandvery

few new infrastructure projects were implemented. The main casualties of the pull back in underlying public

infrastructure spend (which abstracts from asset sales between sectors) have been South Australia, Victoria and

Tasmania.ThedeclineinpublicinvestmentspendinginSouthAustraliaappearstoreflecttheunwindingofGovernment

infrastructureprograms implementedduring200809. InVictoria,thereareveryfewpublicsector investmentprojects

currentlyunderway

and

any

projects

that

may

come

online

will

take

anumber

of

years

to

get

up

and

running.

Meanwhile,

significantrevenuepressuresinTasmaniaareweighingonpublicspendinghere.

NSW VIC QLD SA WA** TAS

Private 3.6 1.4 6.2 2.1 7.4 15.5

Public 9.7 11.4 5.0 16.6 6.7 11.3

Total 0.9 0.6 4.0 5.2 6.1 14.3*Abstractingfromassetsalesbetweensectors

**Actual:

underlying

not

available

from

ABS

Yearaveragepercentagechange

Sources:ABS;NAB

UnderlyingGrossFixedCapitalFormation yeartoJune2013*

TheAustralianeconomyhasseenaterrificexpansion incapital investmentovermuchofthepastdecade.Asa result,

therehas,onaverage,beenabroadbased increase incapitalexpenditureasashareofstate finaldemandacross the

Australian states (see Graph). Over more recent years, mining investment has contributed greatly to the capital

expansioninAustralia,makingupthelionsshareoftotalinvestment.Toputthingsintoperspective,theminingsectorin

WesternAustraliaaccountedfor30%oftotalcapitalexpenditure inAustraliaover201213,andtheQueenslandmining

industryaccountedfor19%.Morerecently,however,mininginvestmenthaspeakedanditseemsincreasinglylesslikely

that thenonmining sectorwill have the capacity to respond immediately to themining investment slowdown. The

downturn inmining investment ismostapparent inWesternAustralia,where themajorityofminingactivity is taking

place.Mining investment spending isholdingupbetter inQueensland,boostedby investment in threeLNGprojects

whichare

still

being

constructed,

although

business

investment

is

expected

to

peak

in

Queensland

later

this

year.

To

help

thetransitionaway from investment,theQueenslandGovernment is lookingtobroaden theeconomyby focusingon

construction,tourism,resourcesandagriculture.Elsewhere,thelikesofVictoria,NewSouthWalesandSouthAustralia

havebeenlessaffectedgiventheirlesserrelianceonmining.Nonetheless,adeclineinmanufacturinginvestment,which

is coming under pressure from a relatively elevated AUD and increased competition from the emerging market

economies, ishavingamaterial impactonbusiness investment inthosestateswheremanufacturingmakesupa larger

partoftheeconomy,includingSouthAustralia,VictoriaandTasmania.Overall,whilethereremainsasignificantamount

of(mining)investmentinthepipeline,theoutlookforbusinessinvestmentcontinuestosoften,withtheoveralllevelof

businessinvestmentexpectedtobearound15%lowerthanthecurrentlevelintwoyearstime.


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Graph 7

0

5

10

15

20

25

30

1990 1996 2002 2008 1990 1996 2002 2008

0

5

10

15

20

25

30

WA

Queensland

NSW

Victoria

SA

Mining Manufacturing

Capital Expenditure by Industry by State*Proportion of total Australian capital expenditure, annual sum

* Data not available for Tasmania

Sources: ABS; NAB

% %

Postthemininginvestmentboom:wheretofromhere?

Thenonresidential investmentpipelinepeaked inmid2012, reflecting the significantamountofmining construction

thatwas

being

completed,

combined

with

aslowing

stream

of

project

commencements,

with

many

of

the

mega

mining

projectsalreadyunderway.Thedecline in the investmentpipelinehascontinuedover thepastyear,withparticularly

sharpfallsoccurringinWesternAustraliaandQueenslandwheremininginvestmentismostembedded.Nonetheless,the

pipelineofworkyet tobedone remainsmostelevated in thesestates,ataroundoneyearand threemonths long in

WesternAustraliaandoneyearandonemonth long inQueensland,which together, representsoverhalfof the total

Australianpipeline.Thenonminingstatesarenotexpectedtomakeasignificantcontributiontofuturenonresidential

investmentgivenalreadylowcapacityutilisationandsoftdemand.

TheAustralianBureauofResourcesandEnergyEconomics(BREE)releaseditsupdatedlistingsofmajorminingprojects

inMaythisyear,whichoutlinedthecurrentstateofmining,infrastructureandprocessingfacilitiesprojectsinAustralia.

AccordingtoBREE,thetotalnumberofcommittedprojectsfellfrom87inOctober2012to73inApril2013.However,the

valueofcommittedprojectswasbroadlyunchangedat$268billion(17.9%ofcurrentannualGDP),largelyreflectingcost

overrunswhich

do

not

necessarily

add

to

the

volume

of

activity

or

capacity.

LNG,

gas

and

petroleum

projects

continue

to

dominate thepipelineofcurrentand future investment inAustralia,makingup$205billion (76%)of totalcommitted

projects,withmanyoftheseprojects located inQueensland.Whilethevalueofmineralsandenergy investment inthe

pipeline remains enormous,BREE has highlighted a sharp reduction in the value of projects at the feasibility stage,

providingfurtherevidencethatthemininginvestmentslowdown isunderway.Theshiftfrominvestmenttoproduction

andexportswillhaveimportantimplicationsforoutputgrowthandemployment.

Graph 8

-4

0

4

8

2000 2003 2006 2009 2012 2001 2004 2007 2010 2013

-4

0

4

8

Investment Expenditure*Contribution to annual state final demand

* Gross fixed capital formation

Sources: ABS; NAB Group Economics

ppts ppts

Queensland

NSW

Victoria

WA

SA

Tasmania

Graph 9

0.0

0.4

0.8

1.2

1.6

2.0

2000 2003 2006 2009 2012 2001 2004 2007 2010 2013

0.0

0.4

0.8

1.2

1.6

2.0

Queensland

Victoria

NSW

WA

SA

Yrs Yrs

Non-residential Investment Pipeline*Work yet to be done as a proportion of annual work done

* Calculated as the sumof non-residential building and engineering construction

Sources: ABS; NAB

Tasmania


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Nominalnetinternationaltradestrengtheninginresourcerichstates,butgenerallysofteningelsewhere

Forthefirsttimesince2009,netexportsmadeapositivecontributiontoannualGDPgrowthinSeptemberquarter2012,

withthistrendcontinuingfortheremainderof201213.Followingyearsof intensive investmentactivity,an increase in

miningproductioncapacity inWesternAustraliaandQueensland isnowbeginningtoyieldhigherexportvolumes.Net

exportshaverisensolidlyinWesternAustraliainthefirsthalfofthisyeartobeatveryelevatedlevels,withthetransition

from theminingconstruction toproductionphasegainingmomentum.Queenslandsnominaltradebalancehas lifted

modestlyoverrecentquarters,thoughitremainsatalowlevelrelativetorecenthistory,reflectingthecurrentweakness

incoal

export

volumes.

Elsewhere,

trade

balances

have

been

broadly

steady

in

Victoria

and

New

South

Wales,

with

weaker importshelping to (at least temporarily) stem the longtermdecline in tradebalances in these states.Export

activity inSouthAustraliaandTasmaniahasbeensubdued,withsectorsexposed to thehighAUDcontinuing to face

challengesinthesestates,withparticularweaknessfeltinthelessspecialisedpartsofmanufacturing.

Looking ahead, further expansions in production capacity are expected to be the key driver of export volumes over

comingyears, rather than fluctuations inexternaldemand.Productioncapacitywill rampup solidly inQueenslandas

LNGprojectsbegintoyieldmoreoutput.Onthedemandside,themajorityofexternaldemandforAustraliasexports

willcomefromChinaAustraliaslargesttradingpartnerwhichaccountedforalmost32%ofthecountrysmerchandise

exportsin201213.Whilemostofthestrengthindemandisexpectedtocomefromtheemergingmarketeconomies,the

recovery ingrowth inthemajoradvancedeconomiesshouldalsohelptostrengthendemand.Exports incommodities

continue todominate tradepatternswhile ruralexportshave liftedconsiderablyover thepastyearor so, in linewith

improvedconditions.

Graph 10

-15

-10

-5

0

5

10

15

20

1985 1990 1995 2000 2005 2010 1987 1992 1997 2002 2007 2012

-15

-10

-5

0

5

10

15

20

Net Exports of GoodsNominal


$bn $bn

Queensland

NSW

Victoria

WA

SA

Tasmania

Graph 11

0

10

20

30

40

50

1985 1991 1997 2003 2009 1987 1993 1999 2005 2011

0

1

2

3

4

5

Goods & Services ExportsChain Volume Measures (reference year 2010-11)


$bn $bn

Other

Rural

Commodities

Travel

Transport

Other Services

WhileVictoriaandNSW typicallyhave large internationaltradedeficits inmerchandisegoods, it isservicestradethat

generallydrivesexportperformancewithinthesestates,accountingforaroundtwothirdsoftotalexports.Accordingto

balanceofpaymentsdata,Australianservicesexportsfellby0.7%over201213,withfallsintransportandtravelexports

mostly offset by a rise in other services.With aweakerAUD and international student enrolments on the rise, it is

possiblethatVictoriaandNSWmaybenefitfromimprovednetservicestradeovercomingquarters.

Labourmarketconditionsdeteriorateinsoftgrowthenvironment

ThelabourmarkethasweakenedconsiderablysinceourlastStateEconomicUpdatesixmonthsago.Inthesoftgrowth

environment,businesses continue to look forways tooperatemore efficiently and at a lower cost,which inevitably

means reducing employment. Indeed, the pace of employment growth has slowed over the past year and the

unemploymentratehasgraduallyrisento5.8%,fromcloserto5.0%ayearearlier.Thereareclearsignsthattheslowing

inlabourintensivemininginvestmentisalreadyhavinganimpactonlabourmarketconditionsinWesternAustralia,with

the unemployment rate rising to almost 5% in trend terms in August, up from 4%just one year earlier. Themore

diversifiedVictorian,NewSouthWalesandtoalesserextentQueenslandeconomieshavebeenmuchmoreresilientto

labourmarketweaknessasaresultoftheirmorediversifiedindustrystructures,withunemploymentratesinthesestates

risingjust0.10.2pptsoverthepastyear.The recentupswing intrend ratesofunemployment inTasmaniaandSouth

Australia have been much more concerning, with current rates of 8.6% (6.9% one year earlier) and 6.8% (5.6%)

respectively.Theweakness intheTasmanian labourmarket isconsistentwiththedifficultiesofremainingcompetitive

with

mainland

Australia

and

overseas

markets,

largely

reflecting

the

economys

large

exposure

to

the

AUD

as

well

as

its

mixof industriesbeingskewed towardsweakersectors.Furthercompounding theweakness in theTasmanian labour

market is thesharp reduction inaveragehoursworked,whichwillhavehelped topreventa further rise in the rateof

unemployment.AveragehoursworkedfellsharplyinWesternAustralia,whiletheywerealittlelowerelsewhere.


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Graph 12

2

3

4

5

6

7

8

2005 2007 2009 2011 2013 2006 2008 2010 2012

2

3

4

5

6

7

8

Unemployment RateTrend

Sources: ABS; NAB

%

Queensland

NSW

Victoria

WA

SA

Tasmania

%

Graph 13

-4

-3

-2

-1

0

1

2

2005 2007 2009 2011 2013 2006 2008 2010 2012

-4

-3

-2

-1

0

1

2

Average Mon thly Hou rs WorkedAnnual average percentage change; sa

Sources: ABS; NAB

%

Queensland

NSW Victoria

WA

SA

Tasmania

%

Labourmarketindicatorsgenerallypointtoamoderationinemploymentgrowthlargelyreflectingthefrictionalimpact

structural adjustment in the Australian economy is having on hiring. The deterioration is already underway, with

employment fallingoverrecentmonths.Weseetheunemployment rateexceeding6%bytheendofthisyear,before

risingto

around

6%

by

mid

2014.

The

higher

rate

of

unemployment

is

likely

to

be

particularly

apparent

in

Tasmania

and

SouthAustralia,whereunemployment isalready rising rapidly,while theNewSouthWalesandVictorianeconomies

shouldbemoreshelteredduetohavingmorediversifiedindustrystructures.IntheminingstatesWesternAustraliaand

Queensland the decline in labourintensive mining investment should see unemployment rates risemodestly and

remainelevatedforsometime.

Therateofnetinterstatemigrationappearstohavestabilisedacrossallstatesoverthesecondhalfof2012(latestdata

available).Thetwolargestminingstates,WesternAustraliaandQueensland,continuetobenefitfromapositiveflowof

interstatemigration inresponsetohighlevelsofminingrelated investment intheresourcerichstates.Consistentwith

theweakeroutlookformininginvestmentovertheforecasthorizon,WesternAustraliaandQueenslandareexpectedto

experienceadecline in interstatemigration.Victoriacontinuestogainfrom interstatemigrationbutthegainsareonly

marginal.NewSouthWalescontinuestoexperienceanoutflowofnetinterstatemigrationbuttherateofdeclinehasalso

eased.

Tasmania

and

South

Australia

have

experienced

a

continued

outflow

of

migration.

The

outflow

of

people

from

thesestatesishavinganegativeimpactofsomeindustriesandiscontributingtoweakeractivityrelativetotherestofthe

country.

Graph 14

-60000

-40000

-20000

0

20000

40000

1982 1988 1994 2000 2006 2012 1986 1992 1998 2004 2010

-60000

-40000

-20000

0

20000

40000

Annual Net Inters tate Mig rat ion

Sources: ABS; NAB

Queensland

NSW

VictoriaWA

SA

Flow of

persons

Flow of

persons

Tasmania

Wagepressureseasing,consumerpriceinflationundercontrol

Soft domestic demand and excess spare capacity have simultaneously weakened demand for labour, which has

restrainedwagegrowthtohistoricallylowlevels.Thewagepriceindex,whichmeasuresthecostofaunitoflabour,rose

by2.9%overtheyeartoJunequarter2013,whichwasthe(equal)softestoutcomesinceMarchquarter2000,justpriorto

theintroduction

of

the

GST.

Wage

growth

has

been

especially

subdued

in

New

South

Wales

and

Queensland,

rising

just

2.8% over the year to June quarter. Theweakness inwage growth in part reflects government initiatives aimed at

reducingpublic sectorwageburdens.Forexample, theNewSouthWalesgovernmenthas imposeda2%ceilingon

annualremunerationexpensesandintroducedothermeasurestomanageexcessemployees.TheVictoriangovernment


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8


has implementedasimilarschemeprovidingforannualisedwage increasesof2%(largerincreasesmustbeoffsetby

genuineproductivitygains),supportingbelowtrendpublicsectorwagegrowth.TotalwagegrowthinVictoriawasalso

soft,at3.0%overtheyeartoJunequarter. WhilewageincreasesremainrelativelystrongerinWA,rising3.4%overthe

year,therehasbeenaclearmoderationinquarterlygrowthinresponsetoincreasingsparecapacityintheresourcerich

partof thestate.Thismomentum isexpected tocontinue throughout201314as the flowof labourintensivemining

investment continues to ease. These effectswill be compounded by a softening in activity in businesses supporting

mining,where demand for labour is expected to decline.Whilewage growth has held up reasonablywell in South

Australia,up3.3%overtheyear, ithasgenerallymoderatedoverthecourseof201213 inquarterlyterms,suggesting

growthmomentum

is

trending

lower.

Growth

in

Tasmanian

wages

has

been

especially

soft,

up

just

2.9%

over

the

year,

which isconsistentwithrelativelyweak labourmarketconditions.With labour intensivemining investmentsettoease

and the nonminingpartsof the economy showing little signof strengthening anytime soon, theoutlook forwages

remainssubdued.

Consistentwithsoftdomesticdemandand labourmarketconditions,quarterlyconsumerpriceinflationhasmoderated

acrossthecapitalcitiessinceSeptemberquarter2013.Inannualterms,inflationacrossthecapitalsremainedwellwithin

(or in the caseofTasmania,below) theRBAsmediumterm targetof23%,evendespite the solidboost toprices in

Septemberquarter2013which resulted fromthe implementationof theFederalGovernmentscarbontax.Underlying

measuresofconsumerpriceinflation(atthenationallevel)werealsorelativelysoft,withtheaverageofweightedmedian

andtrimmedmeanCPImeasuresrunningataround2.4%intheJunequarter.Withtheimpactofcarbonpricingexpected

to largelywashoutofannual inflationnumbersfromSeptemberquarter2013,weseeheadline inflationdippingbelow

2%.Price

pressures

have

moderated

notably

across

all

states

in

the

first

half

of

2013,

even

despite

aseries

of

RBA

cash

ratecutswhichwereintendedtoboostdomesticdemand.Annualratesofinflationrangedfrom1.8%inHobartto2.6%

in Sydney in the June quarter. The weakness in prices growth in Tasmania reflects a deterioration in discretionary

spendingtobelowthelevelpriortotheglobaleconomicdownturn in2008.Whiletherecentsharpdeteriorationinthe

valueoftheAUDwilladdtopricepressuresthrough itstransmissiontohigher importcosts,thefulleffectsofthiswill

takea long time towash through theeconomy.Furthermore, thesoftness in thedomesticeconomymay restrict the

abilityofbusinessestopassonhighercosts,whichmayseeprofitabilitydeclineratherthanpricesincrease.

Graph 15

2

3

4

5

2005 2007 2009 2011 2013 2006 2008 2010 2012

2

3

4

5

Wage Price IndexYear-ended percentage change

Sources: ABS; NAB

% %

Queensland

NSW

Victoria

WA

SA

Tasmania

Graph 16

0

1

2

3

4

5

2005 2007 2009 2011 2013 2006 2008 2010 2012

0

1

2

3

4

5

Consumer Price IndexYear-ended percentage change

Sources: ABS; NAB

% %Brisbane

Sydney

Melbourne

Perth

Adelaide

Tasmania

Housingmarketrecoverygainingmomentum

Emerginggreenshootsinthehousingmarkethavegainedmoretraction,withallstatesreportinghigherannualratesof

dwellingspricegrowthcomparedtoayearagowhenpriceswereinmoderatedecline.AccordingtothelatestmonthlyRP

DataRismarkdata,averagedwellingspricesacrossAustraliascapitalcitiesroseby5.3%overtheyeartoAugust2013

the eighth consecutive positivemonthly growth outcome though deviations in annual growth across capital cities

remain,meaningthe recovery inthehousingmarkethasnotbeenequal.Muchof thevariation ingrowth reflectsthe

varianceinstateeconomicconditions,whichisaffectinghouseholdinvestmentdecisionsdifferently.Theoverallrecovery

inpropertypriceshasbeen ledbyPerth,with this state stillbenefiting from the resourcesboom,whichhasboosted

populationgrowthandputadditionalpressureonrentalmarketconditions.Thedwellingpricerecoveryhasalsogained

more traction in theSydneypropertymarket,underpinnedbysolidgrowth in rentalprices,populationandhousehold

income, aswell as an undersupplyof housing. Furthermore,New SouthWales households appearmore sensitive to

interestrates

than

other

states,

with

the

low

interest

rate

environment

helping

to

support

demand

for

housing

as

well

as

anundersupplyintermsofdwellingsperperson.WhiletheMelbournepropertymarkethastakenlongertorecoverthan

mostothermarkets, reflectingacorrection fromespeciallyhighgrowth in thepostGFChousingboom, thedwellings

pricerecoveryisalsogatheringpaceinMelbourne.Elsewhere,propertymarketsarelessrobustinAdelaideandBrisbane,


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9


andpricesarestilldeclininginHobart.Itislikelythatconcernsabouttheeconomicoutlookandjobsecurityareweighing

onhousehold investmentbehaviour inthesecities.Nonetheless,theQueenslandgovernments GreatStartGrantand

TasmaniasFirstHomeBuilderBoostshouldhelptosupporttheconstructionofnewdwellingsin201314.

Graph 17

-10

0

10

20

30

40

50

2002 2005 2008 2011 2002 2005 2008 2011

-10

0

10

20

30

40

50

Sources: RP Data; NAB

Brisbane

Sydney

Melbourne

Adelaide

Perth

Hobart%%

RP Data Dwelling PricesYear-ended percentage change

Graph 18

0.00

0.05

0.10

0.15

0.20

0.25

0.30

2000 2003 2006 2009 2012 2002 2005 2008 2011

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Sources: ABS; NAB

Brisbane

Sydney

Melbourne

Adelaide

Perth

Hobart

%%

Dwelling Completions to Population RatiosAverage over quarter

With conditions in the residential propertymarket improving, the outlook for dwellings investment appears to have

strengthened. Consistent with the improvement in housing demand, ABS data show that prices for new homes

purchasedbyowneroccupiersroseby3.6%overtheyeartoJunequarter2013thehighestpaceofannualgrowth in

threeyears.Whencombinedwithamarginallysofter3.2%riseinhourlyratesofpayfortheconstructionindustry,aswell

asamodest1.2% rise in inputcosts to thehouseconstruction industry, the rise inprices fornewhomes implies that

marginshave improveda littlecompared to sixmonthsago,when theywerebeing squeezed.Furthermore, theABS

establishedhousepriceindex,weightedfortheeightcapitalcities,showeda5.1%riseinhousepricesovertheyeartothe

Junequarter2013.Improvingmarginsandrisinghousepricesshouldeventuallyunderpinstrongerdwellingsinvestment.

Indeed,wearealreadyseeingevidencethathousingconstructionratesare improving insomestates,withtheratioof

dwellingcompletionstopopulationshowingsignsof recovering.TheAdelaideandHobartmarketsare theexception,

whereverysofteconomicgrowthandoutflowsofnetinterstatemigrationarelimitingtheneedforadditionaldwellings.

Nonetheless,the

Melbourne,

Brisbane

and

Sydney

markets

are

all

benefiting

from

an

increase

in

the

rate

of

dwellings

to

population, which should help to reduce the degree of undersupply in these cities. While the rate of dwellings

construction has been relatively stable in Perth, this market is continuing to experience a solid pace of additions,

especiallygiventhesurgeinpopulationgrowththathasoccurredoverrecentyears.Weexpectdwellingsconstructionto

strengthenin201314,althoughfinancerestrictionsmaylimitgrowth,atleastinthenearterm.

Graph 19

-6

-4

-2

0

2

4

6

8

2000 2003 2006 2009 2012 2001 2004 2007 2010 2013

-6

-4

-2

0

2

4

6

8

Sources: ABS, NAB

Brisbane Sydney

Melbourne

Adelaide

Perth

Hobart

%%

Real RentsYear-ended percentage change

Graph 20

-2

-1

0

1

2

3

WA Vic NSW SA/NT Qld Australia

J un-12 Mar-13 J un-13

Expected House Price Growth12 months ahead

%

Source: NAB Residential Property Survey

3

%

2

1

0

-2

-1

Underlyingdemand forhousingappears tohave strengthened into2013,helpedby lower interest ratesanda recent

upturn in consumer sentiment.While there are signs of an upswing in housing trends, still soft wages growth and

concernsabout

job

security

in

the

deteriorating

labour

market

environment

are

likely

to

keep

demand

for

housing

somewhat restrained, preventing the exceptional pace of house price growth seen over most of the last decade.

Nonetheless, the interest rate environment is expected to remain very accommodative for some time,which should

providecontinuedsupporttounderlyingdemand.


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10


Consistentwiththegeneraldowngradetotheoutlookforeconomyovertheforwardestimates,theJunequarter2013

NAB Residential Property Survey has shown a slight softening in expectations for house prices over 201314.

Nonetheless,expectationsarestillforhousepricestoriseacrossallstates.Accordingtothesurvey,respondentsexpect

housepricestoriseby1.4%nationallyin201314(2.2%atthetimeoftheMarchquartersurvey),withsofterpricegains

forecast for all states. Expectations remain strongest forWesternAustraliandwellings, largely reflecting the existing

undersupplyofhousing,althoughpricegrowthforthisstatewasdowngradedmostsignificantlyasaresultofthefaster

thananticipated slowing inmining investment,which is impacting the rateofpopulationgrowth.Expectationswere

softestin

South

Australia

and

Queensland,

while

they

were

broadly

similar

and

close

to

the

national

average

for

New

SouthWalesandVictoria.

Stategovernmentfiscalpositionsgenerallyweakerthanatthetimeofmidyearreviews

All of the state treasuries have revised down their 201314 estimates ofGSP since producing theirmidyearBudget

reviews,reflectingaweakerglobaleconomicenvironmentandasofteroutlookforlabourmarketactivity.TheWestern

Australian Treasury has downgraded its 201314 GSP estimate by 1.0ppt, reflecting a sharper projected decline in

business investment in response to the softened outlook for Chinese growth, volatile commodity prices and the

possibilityoffurtherpricedeclines.Notonlyhavethesefactorsledminingfirmstoreassesspotentialprojects,butthey

arealsoencouraging firms to reassessexistingoperationsby focusingmoreon reducing costs rather than increasing

capacity.InQueensland,exTropicalCycloneOswald,whichcausedseverefloodingacrosspartsofthestateinearly2013,

hitagricultural

production

especially

hard

and

the

resulting

economic

production

losses

are

estimated

to

be

in

the

order

of$500700million in201213 (excludesdamagebill forprivateandbusinesspremisesandpublicproperty).Whilethe

QueenslandTreasurydoesnotprovideanestimateoftheimpactofthecycloneon201314growth,aproportionofthe

0.75pptdownwardrevisionto201314growthislikelytocapturethis.Theexpectationformininginvestmenttodecline

sharplyafter2013,relativelypoorhousingmarketfundamentalsandsoftpopulationgrowthprojectionsarelikelytohave

been responsible for the remainder of the downgrade. The South Australian Treasury has lowered its GSP growth

estimatefor201314by0.5ppts,acknowledgingthatanumberofsectorsthatfacechallengesahead,especiallytrade

exposed sectorsand thoseheavily reliantonconsumer spending.Manybusinesses in these industriesare likely tobe

adverselyaffectedasaresultofthesofterglobalgrowthenvironment.VictoriaandNewSouthWales,whichhavemore

diversifiedindustrystructures,looksettoweathertheeffectsoftheminingtransitionbetterthanmoststates.InVictoria,

asofternationalgrowthoutlookisexpectedtoweighmoreheavilyoninterstatetrade,whichisakeycomponentofthe

Victorianeconomy,whilethesofteroutlookfortheglobaleconomyisexpectedtoweighonexports.Similarly,theNew

South

Wales

economy

is

expected

to

be

affected

by

weakness

elsewhere,

though

the

downward

growth

revision

for

201314of0.25pptsisslightlybelowthatofVictorias(0.5ppts),probablyreflectingtherelativelyhighsensitivityofNew

SouthWaleshouseholds to (lower) interest rates.Theoutlook for theTasmanianeconomyhasbeen revised lower in

201314,with this state highly exposed to the still elevatedAUD due to its industrymix and especially the types of

manufacturingproductsitexports,whichislesseningitscompetitivenesswiththemainlandandoverseasmarkets.

With the deterioration in the national growth outlook putting immense pressure on the fiscal positions of state

governmentssincethetimethemidyearBudgetreviewsweresubmitted,stategovernmentrevenueprojectionshave

generallybeen revised lower.Thedeterioration in revenueprojectionshasput increasedpressureon stateoperating

balances,whichhavegenerallybeen revised lowerasaconsequence.Queenslandsnetoperatingbalance for201314

was revised down by $3.0bn, mainly due to unanticipated disaster recovery payments following severe weather

conditionsatthebeginningof2013.Tasmaniasnetbalancewasalso reviseddownnotably ($340million), reflectinga

softeroutlookforemploymentgrowthandotherkeyeconomicindicatorsimpactingontaxreceipts.Incontrast,Western

Australiasnet

fiscal

operating

balance

has

been

revised

up

($570

million),

in

part

reflecting

additional

revenue

of

$475millionthatisexpectedtobegeneratedbytheGovernmentsFiscalActionPlanaswellasstrongerprojectionsfor

underlying transferduty collectionsandhigher forecasts formining revenue.Elsewhere,netoperatingbalanceswere

littlechangedfor201314,whiledowngradestothestategovernmentoutlooksmeantageneraldeteriorationinforecasts

forgeneralgovernmentnetoperatingbalancesin201415.

Bystate,theQueenslandTreasuryexpectsitsnetoperatingdeficittoimproveto$3.8billionin201314,whichisaround

$3 billion larger than what was expected at the time of the mid year fiscal and economic review (MYFER). The

deteriorationinprojecteddeficitlargelyreflectstheincorporationofcostsassociatedwithrecentfloodingcausedbyex

TropicalCycloneOswald.TheQueenslandTreasuryhasprojected a $2.1billion surplus in 201415, asa resultof the

Governments fiscal repair initiatives,which include reducingdebtand targeting full fundingof longterm liabilities in

accordancewithactuarialadvice.ThenetoperatingdeficitforNewSouthWalesimprovedatouchto$329million;with

theeconomic

outlook

for

this

state

broadly

unchanged

since

MYFER,

the

improved

Budget

position

largely

reflects

efforts to restrainexpendituregrowth.However, for201415aBudget surplusof$829million isanticipated,which is

lower than previously projected, reflecting the impact of amendments to the accounting standard applied to

superannuationaccrualexpenses in201314.WhileSouthAustraliasnetoperatingposition is relativelyunchanged for


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11


201314,adverserevenuemovements, includingadjustmentstoexpectedGSTcollectionsandstatetaxationrevenues,

haveaffectedthenetoperatingbalancefor201415.TheSouthAustralianTreasuryestimatesanetoperatingdeficitof

$431millionin201415.VictoriaandWesternAustraliaaretheonlytwostatesforecastinganetoperatingsurplusin2013

14($818millionand$386millionrespectively).InVictoria,thenetoperatingsurplusisprojectedtoriseto$1.0billionin

201415,which ismodestly softer than the surplusestimatedat the timeof itsMYFER,while theWesternAustralian

Treasuryprojectsitsnetoperatingbalancetodeterioratetoadeficitof$147millionin201415,reflectinglowerexpected

tax revenue due to soft labour market conditions. The Tasmanian Treasury estimates its net operating balance to

improvemarginallyovertheforwardestimates,risingfromadeficitof$267millionin201314toadeficitof$165million

in2014

15.

Graph 21

-6

-4

-2

0

2

NSW Vic Qld WA SA Tas

2012-13 2013-14 2014-15 2015-16 2016-17

$bn$bn

Source: State Treasury end-year Budget statements

Net Operating Balance

2

0

-2

-4

-6

Compositionofproduction

NSW VIC QLD SA WA TAS Australia

Agriculture 2 3 3 6 2 8 3

Mining 3 2 11 5 36 2 10

Manufacturing 8 9 8 10 5 9 8

Construction 6 6 9 7 12 7 8

WholesaleTrade 5 5 6 5 3 3 5RetailTrade 4 6 5 5 3 6 5

Finance&Insurance 15 13 7 9 4 8 10Property&Business 13 14 11 9 8 7 12

Other 43 42 41 43 26 50 40

2011/12ShareofStateProduction(%)

Source:ABS

AlexandraKnight RobBrooker AlanOster

Economist Australia HeadofAustralianEconomics&Commodities GroupChiefEconomist

(613)92088035 (613)86341663 (613)86342927

[email protected] [email protected] [email protected]


12/12

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