The 97% / 3% economy

In the period of the start to end of Australia’s China-fuelled resource investment spending boom the two (make that multi) speed growth nature of the economy has been a popular theme. When mining resource investment spending was growing at its strongest pace early in the decade Western Australia, Queensland and Northern Territory boomed and provided the main support for Australian economic growth. The sharp decline in mining resource investment over the past two years has seen pronounced weakening in the pace of economic growth in just about all states outside of New South Wales and Victoria. The change in the relative economic fortunes of Australia’s states and territories has been very pronounced over the past year and one issue is whether the relative strength in New South Wales and Victoria can continue to more than offset the relative weakness elsewhere.
Stephen Roberts

Altair Asset Management

At the outset, it is worth pointing out that while New South Wales and Victoria combined is geographically a relatively small part of Australia, their combined labour forces are far from small representing more than 57% of Australia’s 12.7 million labour force at June 2016. It might seem to be no bad thing having relative economic strength in these two states. The problem is that relative strength in these two states and relative weakness elsewhere seems to have become much more pronounced over the past year, at least as far as labour market conditions are concerned. The issue is can New South Wales and Victoria continue to do the heavy lifting in terms of Australian economic growth?

Nationally, employment rose by 225,000 in the year ending June 2016. In New South Wales and Victoria employment rose over the same period by 218,100 or 97% of the national total. Outside of these two states, a huge area of Australia representing nearly 43% of the national labour force experienced only 3% of total annual employment growth. The marked differences in employment growth reflected in relative changes in unemployment rates too. Nationally, the unemployment rate fell from 6.1% in June 2015 to 5.8% in June 2016, the order of improvement that on the face of it keeps the household sector relatively happy to spend more and comfortably service rising debt, especially rising debt related to home purchase. The fall in the unemployment rate also contains the risk of potentially rising bad and doubtful debts for Australia’s banks with their record proportion of home loans relative to total loans outstanding.

The national fall in the unemployment rate, however, masks the different performances of New South Wales and Victoria combined where the average of their two unemployment rates fell from 6.0% in June 2015 to 5.5% in June 2016 compared with the average unemployment rates for the other four main states that only edged slightly lower from 6.6% in June 2015 to 6.5% in June 2016. In these latter four states, the average unemployment rate has sat at a level that is starting to constrain household spending and is probably starting to create strain servicing household debt in these states. In contrast, New South Wales and Victoria are still experiencing strength in household spending, including on housing.

Looking at household spending, the most recent retail sales data are for May 2016. Nationally, retail sales rose by 3.4% compared with May 2015. In the two strong states, New South Wales and Victoria, both experienced identical growth in retail sales over the same period of 4.9%, well above the national growth in retail sales. In contrast, the two big mineral resource states, Queensland and Western Australia experienced retail sales growth over the same period of 0.4% and 0.8% respectively. Allow for inflation and annual real retail sales growth actually fell in both states. Retail sales are growing well in New South Wales and Victoria but have already fallen into recession in Queensland and Western Australia.

This division between strength and weakness is also evident in the change in house prices too. Latest Australian Bureau of Statistics’ house price data is available for Q1 2016 and showed national house prices up by 6.8% compared with Q1 2015. No surprise, Sydney up 9.7% over the same period and Melbourne up 9.8% were both well ahead of the national average. House prices in Brisbane were up too, but only 4.1% while house prices in Perth were down by 4.9%.

Looking ahead, it is possible that the relative economic strength of New South Wales and Victoria could continue, but the probability of this occurring is declining. New home building activity, especially of multi-occupancy units has probably peaked in both states. Because past home building activity has been so strong, there is also a risk that parts of the housing market are now over-supplied and will suffer a period of weak if not falling house prices. Fading strength in housing activity will not only dent growth in jobs associated with home building but is also likely to temper growth in jobs in retailing too. In short, employment growth looks less strong in New South Wales and Victoria over the next year relative to where it has been over the past year.

Relative employment growth where 97% has occurred in just two states was always going to be hard to sustain. There are now reasons to suspect that the strength in New South Wales and Victoria is going to fade but without any real reason why the rest of the country is going to get materially stronger. The Reserve Bank will be watching these trends too and if inflation readings continue to stay low – which seems more likely than not – it will continue to respond by cutting interest rates further.

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Stephen Roberts
Stephen Roberts
Chief Economist
Altair Asset Management

Stephen is the Chief Economist and a member of Altair’s Investment Committee. He provides a comprehensive review and outlook of macro-economic factors likely to influence financial markets. Stephen is an economist/strategist who has worked for...


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