Quarterly states and territories chart pack: The manufactured slowdown is working across the country

In brief

• While State Final Demand increased in most states and territories in the first quarter of the year, the economy is expected to slow further, and a period of below-trend growth is ahead.
• Inflationary pressures are moderating too, with inflation likely to have peaked in all states and territories.
• Labour costs remain an upside threat to inflation. Real wages growth, however, remains negative across the states and territories.
• In June, NSW and Western Australia maintained unemployment rates below 3.5 per cent and the labour market remains tight in most other states too.
• Retail trade fell in most states in June and we expect that this slowdown will continue.

Manufactured slowdown is working

The Reserve Bank of Australia (Reserve Bank) has raised the cash rate by 400 basis points since May last year, and the manufactured slowdown in the economy is working to tame inflation.

The Reserve Bank has acknowledged that the economy is experiencing a period of below-trend growth. This is expected to continue, and we anticipate it will be felt almost equally across the states and territories.

State final demand (SFD) increased in most states and territories in the first quarter of this year, with Western Australia and Victoria leading the growth (0.8 and 0.7 per cent growth through the quarter, respectively). Exceptions to this were the Northern Territory which saw a SFD fall by 0.4 per cent through the quarter, driven by a decline in discretionary spending by households and private investment. Tasmanian SFD also contracted by 0.2 per cent, driven by a fall in both public and private investment.

States and territories received a confidence boost when their FY24 Budget reports were delivered over the past few months (with the exception of NSW, where the Budget has been delayed until 19 September due to the March election). Budgets revealed payroll tax gains from a stronger than expected labour market, and higher commodity prices led to upward revisions in budget estimates. In Queensland, for example, coal royalties are estimated to have totalled $15bn in FY23 – more than double that in FY22. Budget papers also revealed that state treasury departments forecast a slowdown in Gross State Product (GSP) growth in either FY24 or FY25, and a pick-up thereafter.

What to expect in the second half of the year?

Fortunately, inflation has started to moderate in all states and territories – and this has happened slightly faster than expected, with the June inflation data surprising to the downside. This suggests the Reserve Bank’s dozen rate hikes are working.

In Adelaide, inflation is the highest at 6.9 per cent through the year to June, while in Perth it is the lowest at 4.9 per cent. However, it will take some time to get inflation back within the Reserve Bank’s target band of 2-3 per cent, and the central bank does not expect this to happen until late 2025.

Wage pressures, as measured by the Wage Price Index (WPI), have picked up in all states and territories. Perth and the ACT are leading this pick up, with wages growth at 4.2 per cent over the year to the June quarter. The Northern Territory is lagging, with annual wages growth at 3.3 per cent. This trajectory is likely to continue, given 2.75 million workers will have received a wage boost of 5.75 per cent or more on 1 July, as announced by the Fair Work Commission. Nevertheless, real wages (nominal wages minus the rate of inflation) remain negative, meaning cost of living pressures continue to be felt across Australia.

The labour market is still healthy. Nationally, the unemployment rate sat at 3.7 per cent in July, only a little above the all-time low of 3.4 per cent in October last year. NSW and Western Australia delivered very low unemployment rates of below 3.5 per cent. Even the highest unemployment rate, 4.7 per cent in Tasmania, compares well historically.

However, the Reserve Bank expects this to change, with July’s 3.7 per cent unemployment rate forecast to rise to 4.5 per cent by 2025 – and this will be necessary to bring inflation back into the target band.

The unemployed people to job vacancy ratio remains at historically low levels, ranging between 0.7 per cent in the Northern Territory, and 1.6 per cent in South Australia.

Consumer sentiment continues to linger at recessionary levels, and we have begun to see the long-expected slowdown in household consumption.

Household consumption dipped in Queensland (-0.1 per cent) and fell in the Northern Territory (-0.7 per cent) through the March quarter. Retail trade in real terms (i.e., adjusted for inflation) fell 0.5 per cent in June compared to the previous month. All states except the ACT, South Australia and Western Australia recorded falls.

House prices have started to recover, and the Sydney market is leading the way with dwelling prices up 8 per cent since the recovery began in February. Brisbane dwelling prices increased 5 per cent, followed by 4 per cent in Perth and 3 per cent in both Melbourne and Adelaide. Darwin and Canberra saw prices increase only 1 per cent, and in Hobart, prices have not picked up yet (but are not falling either). As population growth is expected to be above-trend over the coming years, it is likely that strong demand and lags to new housing supply will put upward pressure on dwelling prices for some time.

Rental inflation is still very strong, with Sydney unit rents rising by 25 per cent over the year to July. All other states and territories have double-digit growth too, except for Canberra and Hobart, where unit rental prices have fallen over the year. The rental vacancy rate has ticked up slightly but remains at low levels between 0.6 per cent (Perth) and 2.1 per cent (Canberra) in June.

Since international borders reopened last year, states and territories have seen population growth bounce back.

Western Australia and Queensland are leading this recovery, with population growth of 2.3 and 2.2 per cent respectively in December 2022. In both states, this is driven by both overseas and interstate net migration. Tasmania and the Northern Territory see the lowest rates to date, with their population increasing 0.5 per cent and 0.8 per cent, respectively. This is largely because residents continue to move interstate in net terms.