Australia | Sep 21 2006
By Chris Shaw
As the September quarter draws to a close Westpac has released an update on the economic conditions in each of Australia’s states and how that is translating in growth for the nation as a whole.
Not surprising the bank’s study finds Western Australia and to a lesser extent Queensland continue to lead the way, the two states accounting for almost all of the national economy’s growth in the first half of the year. This is not a bad thing in the bank’s view, as it implies the economy is acting reasonably efficiently in that higher commodity prices are driving the growth in these states and low unemployment rates in the lagging states such as New South Wales and Victoria means resources (in this case labour) are being concentrated where they can be most productive.
The bank suggests these lagging states may start to show signs of a recovery soon though as their respective housing markets are beginning to again show signs of life, which is likely to have a positive wealth impact. Offsetting this though is the recent rate hike, while the potential for a further increase in rates by the end of the year means any improvement may well be modest.
As a result, the bank expects 2007 to be similar to the current year in that WA and Queensland will lead the way for the nation in growth terms. This is particularly so as on its estimates business investment has peaked in the other states, particularly as it relates to spending on construction projects.
For New South Wales the bank sees a continued period of weak performance (though higher than this year), as while a pick up in housing may provide a short-term boost the rate increases this year are likely to hold growth below normal levels next year. While business investment is tipped to turn down, the bank points out there should be something of an offset from higher capital works spending by the government.
Victoria can expect a similar increase in capital spending, though overall it looks to be in a similar position to its northern neighbour in that while housing is showing signs of recovery the latest rate hike and likelihood of a further increase by the end of the year will hold this recovery in check. More so than in New South Wales the bank sees potential for upside from stronger manufacturing and investment activity.
Queensland still looks good, but the bank points out the boost to household spending from rising property prices has come to an end as the growth in house prices has slowed, so the spending outlook is now in line with the rest of the country. Given regional areas continue to enjoy the benefits of the commodities boom the bank sees growth for the state overall remaining stronger than the rest of the eastern states, especially as addressing infrastructure constraints should give a boost to the mining sector.
Western Australia’s growth rate in recent quarters has been enough to dwarf even China’s, driven by gains in both housing and business investment. The outlook is for more of the same, with consumption in the state forecast to remain above the national average.
South Australia has been one of the improvers, the bank noting rising wealth and an improving labour market as supporting a modest increase in consumption. With activity in the housing market likely to increase further and non-residential construction growing solidly, the prospects look reasonable in the bank’s view, though stability rather than further gains appears most likely.
While Tasmania enjoyed strong growth in previous years there has been something of a pause in 2006 as population growth slowed and resulted in a flattening out of consumption levels. The bank expects housing construction activity will expand in coming months, though this is likely to be offset by an easing in business investment as the pipeline of projects falls.
In terms of forecasts, the bank is expecting Gross State Product (GSP) in 2006/07 to rise in New South Wales to 2.5% from 1.75% this year, with Victoria likely to post a similar improvement in lifting its result to 3.25% from 2.5% this year. Queensland and WA will post the strongest numbers, with the Sunshine State tipped to lift GSP to 4.25% from 3.5% and WA to 5.25% from 4.75%. Flat outcomes are expected in both SA and Tasmania, at 2.75% and 3.5% respectively.