Quarterly states and territories chart pack: Strong growth across Australia, but expect headwinds in 2023

December quarter states and territories chart pack: November 2022

In brief

• All state and territory economies performed better than their long-term growth rates in 2021-22, apart from NSW and the ACT. Bouncing back from COVID-19 lockdowns, Victoria’s growth was strongest.
• There continue to be many positive economic indicators, including the strong labour market and buoyant consumer spending as we move through the fourth quarter of 2022.
• However, as the global economy weakens, interest rates rise, the housing market slows, and floods impact supply in NSW, Queensland, South Australia and Victoria, we expect all the states and territories to feel some economic disruption and weaken as we move into 2023.

2021-22 was a strong year as economies bounded out of lockdowns

All states and territories experienced growth in FY22, as the Australian economy recovered from the pandemic and restrictions eased[1]. Apart from NSW and the ACT, all outperformed their long-run growth rates.

The fastest growing state was Victoria (at 5.6 per cent), followed by South Australia (5.1 per cent) and the Northern Territory (4.7 per cent). Victoria bounced back from COVID-19 lockdowns and restrictions and improved significantly from a fall of 0.3 per cent in 2020-21. NSW recorded the slowest growth at 1.8 per cent in 2021-22, following growth of 2.6 per cent in 2020-21, due to the impacts of lockdowns and border closures in the first half of the year.

Signs of slowdown emerge

The second half of 2022 has delivered a number of mixed indicators across the states and territories.

Consumer confidence has deteriorated across the country as cost of living and interest rates rise. Household wealth has also fallen, driven by a decline in house prices, mainly concentrated in Sydney Melbourne and Brisbane, with Darwin the only capital where house prices have kept rising.

On a positive note, the labour market has been very strong, continuing to add workers even though the participation rate for women is close to a record high. The unemployment rate may be close to its best at 3.4 per cent as forward indicators, like job advertisements are no longer at record highs. The unemployment rate has not been lower for around 50 years.

A solid labour market, plus savings built up during COVID-19, has meant retail sales volumes have remained relatively resilient and have continued to rise into the September quarter, apart from the Northern Territory and Tasmania. ANZ spending data for November indicates that spending has not slowed ahead of Black Friday sales (Black Friday has overtaken other key end-of-year trading days). This is despite strong broad-based increases in retail prices across all industry groups. Western Australia continues to lead the other states in growth of retail sales volumes since the pandemic began. Stricter border controls led to shorter lockdowns and the economy’s momentum, driven by the resources sector continues to be a strong driver.

With very strong labour market conditions and consequently skill shortages, business has been confronted with capacity constraints. When comparing the number of unemployed people to each job vacancy, the ACT (0.6 unemployed people to 1 job vacancy), Northern Territory (0.8) and WA (0.9) are experiencing the tightest labour markets. Rising population growth in Queensland is likely to have cushioned the impact there, with that state winning interstate migrants from NSW and Victoria.

Despite the strong labour market, wages growth has been mild and apart from in certain pockets, firms have not had to bid wages consistently higher. This has been a doubled edge sword for consumer-facing businesses though, as low wages and high inflation have combined to push down real wages for their customers. South Australia had the largest fall in real wages in the September quarter, at over 5 per cent, while Western Australia saw real wages fall by 2.7 per cent.

2023 headwinds

Sentiment towards house buying is fading with higher rates reducing borrowing capacity and lowering housing transfers. Housing market activity is often a big swing factor for economies, and with house prices falling by 10 per cent in Sydney (more than any other capital) consumer spending could cool fastest in this state. Brisbane and Melbourne prices (which are both down 6 per cent from their peaks) are not far behind. Dwelling prices in less populous cities like Adelaide and Perth are down only slightly.

As house prices have fallen, rents have risen around the country, another factor that could slow discretionary spending for some households in the year ahead. Rental prices, when averaged across all capital cities are growing at double digits (in annual growth terms) with rents for units up over 20 per cent and houses up 18 per cent. Perth and Adelaide rental markets have been very tight with a vacancy rate of just 0.4 per cent in October.

Despite new residential construction picking up quickly – particularly in capitals like Perth where state government incentives to build were very generous during the COVID-19 period – there is unlikely to be an increase in the supply of housing for at least the next year or so. The construction industry has been hampered by material and skills shortages although the challenge – equally confronted by states and territories during COVID lockdowns – appears to be easing, with order times normalising and shipping freight rates falling.

Floods will eventually lead to increased economic activity as rebuilding of homes and infrastructure is required. But the short-term impact will be felt through blocked supply chains and transport infrastructure and agricultural produce damage. These supply side problems will lower output and likely push inflation up temporarily in NSW, Queensland, South Australia and Victoria.

Expected slower growth and recessions in our trading partners’ economies in 2023 will impact the trade exposed sectors of Western Australia and Queensland most. The export performances of both of these states has been exceptionally strong with commodity prices soaring over the last two years and export volumes remarkably high – although this is likely to be more muted in future.