Quarterly states and territories chart pack: Speed bumps ahead for all states and territories as rate hikes start to bite

March quarter states and territories chart pack: March 2023

In brief

• Rising interest rates are impacting Australia’s states and territories slightly differently due mainly to the transmission of tighter policy through the housing market.
• House prices are falling everywhere in Australia. While some parts of the country have seen double-digit falls, others saw a modest slowdown of 1-2 per cent.
• We expect the slowdown in private consumption to be more synchronised, although spending has already started falling in Queensland and South Australia.
• The labour market and business confidence and conditions have remained surprisingly resilient.

The new year has delivered a number of new challenges, and some old ones. But parts of the states and territories’ economies have remained surprisingly resilient.

Last year ended with signs of a slowdown

2022 ended slightly differently for each state and territory. If you were in the ACT, Victoria or Western Australia, the December quarter was solid, with State Final Demand increasing 0.3 per cent, 0.2 per cent, and 0.1 per cent, respectively. The Tasmanian economy remained stagnant while State Final Demand declined in the Northern Territory (-0.5 per cent), Queensland (-0.3 per cent) and NSW (-0.1 per cent).

South Australia and Queensland saw a fall in household consumption during the quarter, while private consumption increased in the rest of the country, although at a slow pace. Public consumption increased in all states but Western Australia and the Northern Territory, while private and public investment fell in most parts of the country due to a slowdown in the residential property market and some infrastructure projects.

New year, old challenges

Consumer confidence has remained at recessionary-level lows across the country as the cost of living and rising interest rates bite. Household wealth has fallen, driven by a decline in house prices. While Darwin saw positive house price growth in our last update, dwelling prices have now turned negative here too. House prices have fallen by 14 per cent in Sydney, 12 per cent in Hobart, 11 per cent in Brisbane, 10 per cent in Melbourne and 9 per cent in Canberra. In Adelaide, Perth and Darwin prices came off by much less – between 1 and 2 per cent – suggesting less of an impact on consumer confidence. The varying size falls in house prices in Australia’s states and territories are one key difference between the states’ economic environments going forward.

As house prices fall and mortgage rates rise, dwelling investment continues to ease, having fallen 0.9 per cent through the December quarter. At the same time, an easing of labour and material shortages, the normalisation of freight rates, a strong pipeline of housing projects and severe weather events in most states and territories (further increasing demand for construction) represent tailwinds for the industry.

At the same time rental prices are increasing at double-digit annual rates with the exception of Canberra, Hobart and Darwin. This is yet another pressure impacting household budgets and slowing discretionary spending in the year ahead. Rental markets continue to be tight with vacancy rates of between 0.4 per cent (Perth) and 1.8 per cent (Canberra).

Real wages continue to fall at a fairly synchronised pace across all states and territories, contributing to low levels of consumer confidence. South Australia continues to be the state most impacted, with real wages falling over 5 per cent over the year to the December quarter. Tasmania, the state with the smallest fall in real wages, experienced a 4.2 per cent fall.

Businesses continue to deal with skill shortages, with the labour market remaining tight despite the strong rebound in overseas migration across all states and territories. When comparing the number of unemployed people to each job vacancy, the ACT (0.6 unemployed people to 1 job vacancy), Northern Territory (0.7) and Western Australia (0.9) are experiencing the tightest labour markets.

A new deceleration in other indicators

At the same time, the new year has delivered a slowdown in other indicators.

ANZ card spending data indicated that nominal spending started to fall in mid-February and has continued to fall in March. This is driven by a decline in non-food retailing, which was slightly offset by a pick-up in entertainment and travel spending.

The Reserve Bank has now hiked the cash rate at ten consecutive meetings and another rate hike is expected by market economists, with financial market pricing currently volatile due to recent events in the banking sector. Fixed rate mortgage holders (who secured low rates during the pandemic) have largely been spared from the impact of tighter monetary policy until now, with a large proportion of these mortgages due to roll over to variable rates this year. This will further squeeze households’ budgets.

Among our trading partners, conditions for slower growth and recessions are in place. This means commodity prices (particularly for LNG, coal and iron ore) may moderate over the coming months, which would mostly impact Western Australia, Queensland and the Northern Territory. China represents an upside risk to the commodities story with their recent re-opening potentially increasing demand.

State economies have remained surprisingly resilient – at least until now

Another year of economic change and complexity lies ahead – and that’s before we consider the geopolitical landscape, climate change, transition to net zero and demographic change. But there are also sparks of hope in the economic outlook.

The labour market has remained more resilient than expected, with the unemployment rate the lowest in the ACT at 2.9 per cent, and highest (although still comparatively low) in the Northern Territory at 4.6 per cent. Participation rates remain strong, with the Northern Territory having the highest rate of the states.

Business confidence has remained around pre-COVID levels, while business conditions are higher compared to 2019 – especially in Queensland and Western Australia. This reflects the past resilience of household consumption, but as consumption slows or turns negative, business confidence and conditions are likely to take a hit too.