Economist: State of Play

The economic performance of the states and territories is one reason the Reserve Bank is keeping interest rates at record lows.

Australia rarely has all parts of the country firing on all cylinders at the same time and the regional drivers of growth are far from uniform. Queensland and WA, for example, are more focused on resource exports than the goods and services export-based economy of New South Wales — so more susceptible to global shocks. Victoria is the traditional home of manufacturing, which still is in trend decline, while South Australia boasts the lion’s share of our defence industry, currently in the ascendancy as the car-manufacturing sector closes down. It’s normal for some parts of the country to enjoy boom conditions while others skate close to recession. But our policymakers set the only cash rate at their disposal to a level most suitable to the (weighted) average economic conditions across the country. This necessarily balanced approach to interest-rate setting can’t prevent the persistence of disparate economic performances across the various states and territories.

Victoria, for example — once derided as a “rust belt” of failing manufacturers — now leads the performance race of the states and territories. In the year to June, a healthy 4.7 per cent growth in final demand (measure of growth spending in an economy excluding exports) in Victoria was followed by SA (4 per cent) and Tasmania (3.1 per cent) after adjustment for inflation. Queensland’s domestic economy expanded by 2.8 per cent and NSW, which led the state race until recently, grew 2.4 per cent. The WA domestic economy shrank by 4.3 per cent over the year.

However, these official metrics exclude the impact of net trade — the Australian Bureau of Statistics no longer publishes a regional breakdown of exports and imports in real terms. The state relativities may not change that much, but WA’s economy almost certainly will not have contracted with the addition of trade flows. There has been a huge rise in export volumes from the west, thanks to rising demand from our major trading partners and the mammoth expansion in production capacity. Thankfully, CommSec regularly publishes a State of the States report. In its October findings, CommSec ranked NSW the best-performing state across a range of economic and social indicators, followed by Victoria and the ACT. As with the official data, WA was ranked last, below Queensland and the Northern Territory. SA was the big improver, moving to fourth overall (third on business investment, dwelling statistics and unemployment).

South-eastern states reaping benefits of population growth

The larger south-eastern states are reaping the benefits of unexpectedly rapid population growth, fuelled mainly by rising interstate migration, particularly from previously booming WA. Moreover, Sydney and Melbourne are benefiting from the huge boost to publicly funded infrastructure spending, which generates positive long-term multipliers in the form of faster growth in jobs and activity. NSW also has an extensive regional infrastructure program.

The improved standing of SA reflects a fresh injection of public funds in defence procurement and energy in particular. Private business investment has also rebounded. Queensland, for all its significant status in mining, has a more diverse economy than WA, with larger tourism, services and manufacturing bases. The small Tasmanian economy is prone to large percentage swings in activity, but there are signs that the arrival of more economic refugees fleeing expensive cities on the mainland is having a positive effect. The Apple Isle’s job growth is the fastest in the country (it ranks second on unemployment and third on population growth).

WA remains by far the laggard, according to CommSec. The mining-centric west is still adjusting in the aftermath of the biggest increase in resource-related investment in living memory. The loss of jobs as the mining boom transitioned from labour-intensive construction to more capital-intensive production has inevitably taken its toll. House prices are falling in Perth and, for the first time in more than two decades, interstate migration has turned negative.

Disparate performance ofthe regions

The current disparate performance of the regions goes some way towards explaining why the RBA has maintained the national cash rate at a record low 1.5 per cent for more than a year. The Australian economy as a whole grew by just 1.8 per cent in real terms in the year to June — well below our trend growth rate of above three per cent — reflecting the diverse regional performances.