[CommSec Research]State of the States

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Important Information

The summary and attached report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker.

State of the States

State & territory economic performance report

¾ 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.

¾ Just as the Reserve Bank uses decade averages to determine the level of “normal” interest rates; we have done the same with the economic indicators. For each state and territory, latest readings for the key indicators were compared with decade averages – that is, against the “normal” performance.

¾ In the last report in January 2011 the ACT was the standout economy. And it is clear that it remains at the top of the tree. Dwelling construction, new home loans and population growth in the country’s capital are all above decade averages and ahead of other states and territories. The only real weak spots are consumer spending and business investment.

¾ The Western Australian economy is next strongest, riding the strength in overall economic growth (especially exports), business investment and construction. The Victorian economy has lifted to be next strongest from South Australia, Northern Territory, NSW, Tasmania and Queensland.

¾ Looking ahead, the NSW economy is gaining momentum through low unemployment and business investment while Queensland should benefit from rebuilding activity over 2011.

ACT leads but gap narrows; Victoria continues to lift

· The Australian Capital Territory continues to have the strongest economy in the nation but the gap with the rest of the nation has narrowed. The ACT economy continues to be propelled by above-average population growth, fuelling demand for new and existing homes. Overall construction work is also above average as is economic growth. But retail spending and business investment are under-performing other state & territory economies.

· Looking across the eight indicators, Western Australia is clearly next strongest, underpinned by mining and engineering sectors, driving exports and overall economic growth. But the lead in the saddlebags is provided by the housing sector – demand for new and existing homes and home construction.

· In contrast, the clear driver in the Victorian economy is housing, assisted by historically low unemployment. And the strong job market and housing-related demand is fuelling growth in retail spending. The main drag on the economy is private business investment.

· The economies of South Australia and the Northern Territory remain middle-ranked, with little change in performance over the last three months. Above-average population growth as well as solid construction work are key growth drivers in South Australia. But the Northern Territory has a mix of strengths and weaknesses. Low unemployment is driving retail spending but construction demand and home lending lag other state and territory economies.

· The performance of the NSW economy continues to be restrained by the construction sector – both new home building as well as commercial and engineering activity. Economic growth also lags other state and territory economies. But business investment is above average as is population growth while a pick-up in home lending augurs well for the building sector.

· In Tasmania the areas of strength are relatively low unemployment and above-average dwelling starts while retail spending lags other states and territories. Business investment and non-residential construction are growing, but not at the same pace as other economies.

· The performance of the Queensland economy continues to be hampered by historically low population growth, affecting building and construction activity. And Queensland is the only state or territory economy to have its unemployment rate higher than the longer-term decade average. But rebuilding activity following the floods is likely to be the spark to kick-start growth in coming months.

How was performance judged?

· 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, that can 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, Tasmania’s trend jobless rate 5.8 per cent is higher than other states and territories. But compared with its ‘normal’ or decade-average rate of 6.4 per cent, the jobless rate is actually better than many other economies, underpinning dwelling starts.

· 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. Rather state final demand (household and business spending) is added to exports less imports to act as a proxy for GSP. Excluding the trade sector would provide an incorrect assessment of growth for economies such as Western Australia and Queensland.

· Western Australia continues to lead the rankings on economic activity from the ACT and Northern Territory. In the December quarter, Western Australia’s economic output was just over 27 per cent higher than the state’s decade average level of output. ACT output was up 21 per cent on its long-term average, followed by the Northern Territory (up 18.1 per cent)

· At the other end of the scale economic activity in NSW in the December quarter was just over 9 per cent above its decade while Victorian activity was up 13 per cent on its “normal” or average output over the past decade.

· Western Australia also possesses the fastest annual economic growth rate in the nation at 7.2 per cent, well ahead of South Australia with 4.4 per cent annual economic growth and the ACT at 3.6 per cent.

· The weakest trend economic growth rates were recorded in the Northern Territory, NSW and Queensland.

Retail trade

· The measure used was real (inflation-adjusted) retail trade in trend terms with December quarter data the latest available. Monthly retail trade was also assessed (February data available) to provide further information on trends. There were only slight differences in the rankings despite the monthly data being two months advanced on the real, quarterly readings. Victorian spending was a little weaker and ACT was somewhat stronger.

· Still leading the retail rankings is Northern Territory with spending in the December quarter 22 per cent above decade average levels. Spending has been supported by a strong job market and rising home prices, but retail trade is now actually 1.1 per cent lower than a year ago.

· Victoria was next strongest, with flow-on spending from a strong housing market. Victorian retail spending is now just 19 per cent above decade-average levels but it is 4.8 per cent higher than a year ago.

· Western Australia, Queensland and South Australia were next strongest with little to separate their performances. The ACT remains at the bottom of the leader-board behind Tasmania and NSW.

· In terms of the pace of monthly retail spending – as opposed the actual level of real spending – Western Australia leads the rankings with 3.9 per cent trend growth over the year to February, ahead of the Victoria, the ACT and Queensland. In contrast, trend monthly retail sales are lower than a year ago in Tasmania, Northern Territory and South Australia.

Equipment investment

· Compared with longer-term averages, Western Australia currently is leading other states and territories on equipment investment with spending in the December quarter almost 37 per cent above “normal” – or decade-average. Next placed are NSW (up 35.7 per cent) and Queensland (up 27.6 per cent).

· By contrast, equipment spending in the ACT was 2.4 per cent below decade-averages – the weakest by a large margin. Next weakest economy – Victoria – had business investment 13.3 per cent above its longer-term average in the December quarter with spending in Tasmania up 14.5 per cent.

· Equipment investment was only higher than a year ago in five of the state and territory economies led by NSW (up 20.3 per cent) and Western Australia (up 13.9 per cent).

· In the ACT, equipment investment is 18.9 per cent lower than a year earlier, preceded by Victoria (down 6.7 per cent) and Northern Territory (down 2.6 per cent).

Unemployment

· The Northern Territory has the strongest job market in the nation. In March, the trend unemployment rate stood at 2.4 per cent, almost half the decade-average of 4.7 per cent.

· Next best was Victoria with the current unemployment rate of 4.7 per cent, 12 per cent below the long-term average of 5.4 per cent. And the unemployment rate in NSW stands at 4.8 per cent, below the 5.4 per cent long-term average.

· At the other end of the scale is Queensland with trend unemployment of 5.6 per cent – 1.9 per cent higher than the long-term average of just under 5.5 per cent.

· Trend rates of unemployment have fallen in NSW, Victoria, and the Northern Territory in recent months. But in other states and territories, trend unemployment rates have been largely tracking sideways over the past year reflecting loss of momentum in the broader economy.

Construction work

· The measure used for analysis was the total amount of residential, commercial and engineering work actually completed in trend terms in the December quarter.

· In all states/territories except the Northern Territory, construction work is substantially higher than decade averages. Construction peaked in the ‘top end’ in the March quarter 2009 at record levels. The relatively small Northern Territory economy is affected to a greater extent by the ‘lumpiness’ of major construction projects. Construction work in the Northern Territory is down 24 per cent on the decade average.

· In Western Australia construction work done in the December quarter was just over 70 per cent above the decade average. Next strongest was ACT with construction work 69 per cent higher than decade averages. Construction work in the ACT is also up 27.6 per cent on a year ago – the fastest rate in the nation. The ACT was followed by NSW (up 12.4 per cent) and Western Australia (up 11.6 per cent).

· Construction work is higher than a year ago in all states/territories except Northern Territory (down 7.4 per cent) and South Australia (down 5.3 per cent).

Population growth

· Across the states and territories the current annual rate of population growth was compared with each economy’s decade-average growth pace. And currently population growth is above ‘normal’ in all states and territories except Queensland (down almost 23 per cent) and the Northern Territory (down 21 per cent.)

· Population growth is fastest in Western Australia (2.09 per cent) followed by Queensland (1.85 per cent) with both states consistently leading the rest of the nation, especially over the past three years. But apart from the Northern Territory, other states and territories are continuing to extract greater momentum from population growth with current rates far higher than ‘normal’.

· At the top of the rankings on the population growth leader board is the ACT with current annual population growth of 1.7 per cent, well above the 1.3 per cent decade average. Next best was South Australia, followed by NSW.

· In South Australia the 1.07 per cent population growth is actually second lowest to Tasmania with 0.8 per cent, but it is still well above the 0.9 per cent decade-average growth pace.

· In Queensland, population growth has eased from 2.86 per cent in December quarter 2008 to 1.85 per cent – the slowest growth pace in almost a decade.

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 an indicator of activity in the financial sector. It would be good to also use figures on commercial, personal and lease finance, but unfortunately trend data is not available for states and territories.

· Far away in top position for housing finance is the ACT. The number of housing finance commitments in the ACT is 21.8 per cent higher than the decade-average at a time when all other states and territories except Victoria are recording negative growth. The high level of activity is positive for financial institutions, real estate agents and builders in the territory.

· And while housing lending in the ACT slowed in line with every other state and territory through to January, annual growth picked up in February with lending now 3.8 per cent higher than a year ago.

· Victoria is in second spot for housing finance, with the number of commitments 1.6 per cent above the long-term average. And just like the ACT, annual growth in home lending strengthened in February to be 3.4 per cent higher than a year ago.

· NSW was third on housing finance followed by Tasmania and South Australia.

· The Northern Territory remains the weakest economy for housing finance with trend commitments 30.5 per cent lower than its decade average. In addition, housing finance commitments in February were over 19 per cent down on a year ago. Queensland is next weakest with home lending 27.6 per cent below decade averages and down 12.2 per cent on a year ago.

Dwelling starts

· The measure used was the trend number of dwelling commencements (starts) with the comparison made with 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 or under-building in previous years can determine the current level of starts.

· The ACT continues to lead the pack on dwelling starts. In the December quarter the number of dwellings commenced stood at a record 1,440 in trend terms. Not only were starts double the decade average; they were up on levels of 400-600 a quarter that predominated through most of the late noughties.

· In second spot was Victoria with dwelling starts in the December quarter almost 30 per cent higher than ‘normal’ or “decade average” levels although down from the record highs set in the June quarter 2010. Strong population growth and low unemployment are under-pinning dwelling activity in Victoria together with solid land production.

· Victoria was followed by Tasmania with starts up 15.8 per cent on decade averages. Northern Territory starts were up 3.9 per cent on decade averages with South Australian starts up just over 2 per cent.

· At the other end of the scale, Queensland dwelling starts were not only 30.3 per cent below decade averages but also they are 19.9 per cent down on a year ago. Both results are for the December quarter and thus before flood and cyclone activity hit the state.

· In NSW, dwelling starts were 15.8 per cent below decade averages in the December quarter but starts have at least been growing in annual terms for the past 15 months.

Other indicators

· Consumers in all states and territories are enjoying real wage gains (wages growing faster than prices). ACT workers are doing best with wages up 3.7 per cent over the year, outpacing a 2.1 per cent lift in consumer prices. Interestingly, however, retail spending remains soft in the nation’s capital.

· At the other end of the scale, wages in Victoria grew by 3.6 per cent over the past year, just ahead of a 3.1 per cent lift in the consumer price index for Melbourne.

· Home prices continued to ease across Australia in recent months in response to an increased supply of new homes and softer demand. But growth rates vary markedly across economies. Sydney now leads the way with home prices up 3.3 per cent on a year ago, ahead of Melbourne with a 2.5 per cent lift in prices. But home prices are lower than a year ago in Brisbane, Perth, Darwin and Hobart.

· Real wage growth should be maintained across capital cities in 2011. Home prices should improve over the second half of 2011 in line with a stronger job market, stable interest rates and improved affordability.

Implications and outlook

· When we wrote the last report in January, we noted that there had been some levelling of the performances of state/territory economies. And indeed that trend has continued. Simply it is not correct to say that Australia has a two-speed economy. The ACT economy may be small, but it has demonstrated that it is more rounded than many other state or territory economies.

· All the states and territories have strengths and weaknesses as well as factors driving economic performance and factors holding the economies back. Western Australia may be propelled by China, driving exports and engineering construction, but housing is holding it back.

· Both the ACT and Western Australian economies have been out-performing for around a year. But the interesting point is that Victoria has continued to improve over time. In fact it is conceivable that any one of three economies – the ACT, Western Australia or Victoria – could take top spot over the next three months. Western Australia is being held back by soft housing activity but demand for new and existing dwellings is a driving force in Victoria as is it in the ACT.

· A new government could provide NSW with fresh economic momentum over the remainder of 2011 and into 2012. And the Queensland economy will benefit from rebuilding and refurbishment activity as well as a recovery in coal production. But the high Australian dollar will continue to hamper tourist inflows.

· An on-going challenge for all states and territories is the tight job market. The Federal Government could reduce potential barriers to growth by doing more to boost labour supply.