As we approach the end of the 2006-07 financial year the National Australia Bank has produced another look at how the national economy is travelling.
The Bank says there's emerging evidence that the so-called two speed national economy has disappeared as the faster growing resource boom states of Western Australia and Queensland slow, and the more traditional states of NSW, Victoria and South Australian quicken,
The bank says the key factor though remains the minerals and energy boom which has pushed associated returns in that sector to multi-decade high levels, whereas manufacturing and services have had lower returns and lost price competitiveness to China and others.
This has been the key source of difference across Australian industries, regions and households over the past couple of years.
"Physical and human resources will continue to adjust and thus WA (and other resource-rich areas) will continue to outperform for a little while longer, albeit to a lesser and lesser degree going forward.
"Export price growth has converged across each broad group, which means that there is no more additional impetus to this source of difference.
"Moreover, the boom has partly flowed to the South-East through two main mechanisms – further diminishing the difference.
"Increased government revenue has been partly reinvested in the South-East. Plus equity markets have been propelled forward, providing a fillip to the financial services industry, which is primarily based in the South-East."
The bank says another key source of divergence has also been reduced.
"The differential between Sydney's housing affordability to other cities has diminished somewhat and thus slowed migrant flows to other states, such as Queensland.
"Conversely, Perth housing is now extremely unaffordable, which may become a hindrance to WA's growth. Added to this, better seasonal conditions will add to growth in the South-East relative to the West.
"Looking further forward, we expect that commodity prices will peak during the next year or so and fall thereafter. This will see the exchange rate depreciate, giving the manufacturing and services-driven areas a boost.
"The differing performance of the States is expected to continue to converge as all of these trends evolve. The timing and extent of convergence remains problematic – highly dependent on external growth, commodity prices and the policy response.
The bank singled out these points as highlights for each state and the territories:
NSW
NSW's improvement is capped by the full effects of higher interest rates and the $A. The state's industries are still under international competitive pressures, making it difficult for households to cope with high debt levels and housing prices. This is slowing population growth and further undermining the state's growth prospects.
ACT
The ACT is currently outperforming, boosted by Federal Government stimulus (via earnings and jobs) – indirectly from the commodity boom.
Victoria
Victoria is similarly placed to NSW; however, interstate resident flows are more or less in balance, migrations rates are stronger, and the state's performance is closer to the national average.
Tasmania
Tasmania is slightly improved with the worst of the downturn in business investment and public sector spending now past, but prospects for growth appear limited.
South Australia
SA has been given a boost from additional migrant flows and thus increased housing investment, but the economy will continue to under perform in other areas.
Northern Territory
NT's economy commodity-driven boom has given way to exports (which is less stimulatory than the construction phase), and seen the domestic drivers slow dramatically.
Queensland
Queensland has been benefiting where NSW has not – notably, receiving the residents leaving that state. Business and Government has responded with large investment.
Western Australia
WA is taking full advantage of the commodity boom, but the housing boom has created significant downside risk. We are increasingly concerned that the household sector may be very stretched when the current resource boom looses momentum. And housing affordability looks likely to be a significant issue for the state going forward.
