Tassie beats WA economy: CommSec

Tasmania and South Australia are Australia's top performing economies relative to their historic track record, contrasting with the resources-rich states of Western Australia and Queensland which are growing below par, a new CommSec study has concluded.

The report, Economics: State of the States, released today, assessed the performance of Australia's states and territories by rating their current growth relative to their historic performance over the past decade.

It ranked Tasmania first, followed by SA, WA, Queensland, ACT, Northern Territory, Victoria and New South Wales.

WA rated number one in four of the eight indicators despite the global downturn and many projects in the state being mothballed. It topped the rankings for economic growth, population growth, business investment and construction work, all of which remained at record or near-record levels.

Economic growth in WA for the June quarter was almost 30 per cent above the average level of output over the past decade.

However, WA's ranking was dragged down by its unemployment, housing finance commitments and dwelling commencement rates, largely due to the global recession and winding back of mining activity.

CommSec chief economist Craig James said while resource-backed WA and Queensland were particularly affected by the global financial crisis they should recover the fastest.

"Western Australia and Queensland can be expected to move up the leader-board of economies in response to strong activity in China and the easing of the global recession," he said.

"Improved economic activity should also be expected in NSW and Victoria as financial markets heal and employment recovers. But whether the two largest economies regain economic supremacy will depend on the direction and planning of their respective governments.

"Overall, though longer-term prospects appear brighter for the resources-dependent states and territories."

Indicators used in the report were: economic growth, retail spending, business investment, construction work done, population growth, housing finance, dwelling commencements, and unemployment.

Business investment in WA over the quarter slowed but remained positive at 115 per cent above the decade average, while construction work was 80 per higher than average and growing.

Population growth continued to be strongest in the resource states of WA and Queensland, at 3.1 per cent and 2.6 per cent respectively.

WA's unemployment was 5.7 per cent, compared to the 10-year average of 5 per cent.

Housing finance commitment in WA was growing in annual terms, but had consistently fallen in 2007 and 2008, and sat at 2 per cent above decade average. This compared to top-ranking ACT, which was 36 per cent above average.

Tasmania and SA's strong ratings reflected insulation from the worst of the global financial crisis due to limited financial sectors, as well as strong population growth.

NSW was particularly affected by the global financial crisis due to its significant financial sector.

The CommSec report is pasted below:

State of the States

State & territory economic rankings

- Across all the states and territories, Tasmania currently has the best performing economy in Australia.

- CommSec has assessed the performance of each state and territory economy on eight key indicators. It is clear that smaller economies have weathered the global slowdown the best, followed by the resources states of Western Australia and Queensland. NSW brings up the rear, hardest hit by the global financial crisis.

Tasmania on top, NSW brings up the rear

- Tasmania probably wouldn't be the state that most people think of when it comes to nominating the best performing economy in Australia. But Tasmania was constantly near the top of the leader-board when assessed across eight key indicators. Certainly Tasmania has been less affected than other state and territory economies by the global financial crisis and global recession. But affordable house prices and firmer population growth have also certainly boosted the performance of the Tasmanian economy.
- Second on the leader-board is South Australia. And again it makes sense as the state has a relatively small financial sector and has been less affected by the slowdown in the global economy.
- The resources states of Western Australia and Queensland come next. Western Australia has experienced a significant slowdown in the housing market after stellar gains in 2006 and 2007. And while Queensland is still experiencing high population growth, the gap with other states has been narrowed, affecting housing construction.
- ACT is in fifth spot with middle rankings on most indicators. The Northern Territory finished sixth, with a downturn in investment affecting economic growth while under-performing in housing activity and population growth.
- Victoria and NSW are seventh and eighth respectively in the economic rankings, affected by the fact they have larger financial sectors than other states and territories. Job market performance has lagged other states, affecting retail spending and general economic growth.
- However looking ahead, the resources states look to have the best prospects with the global economy reviving, especially China. NSW should be able to lift from bottom place as the housing market recovers.
How were the rankings decided?
- Each of the states and territories were assessed on eight key indicators: economic growth; retail spending; business investment; construction work done; population growth; housing finance; dwelling commencements; and unemployment.
- The economies weren't ranked on annual growth rates; rather current activity levels were compared with decade averages. Clearly some states such as Queensland and Western Australia consistently have faster growth rates due to historically faster population growth. So the best way to assess economic performance is to look at each indicator in relation to what would be considered 'normal' for that state or territory.
- For instance, Tasmania's trend unemployment rate stands at 5 per cent. While the Northern Territory has lower unemployment, Tasmania's decade average unemployment rate stands at 6.9 per cent. Compared with other states and territories, Tasmania's job market is performing far better, with unemployment well below its 'normal' or decade average rate.
- Similarly dwelling starts. In the June quarter Tasmania's dwelling starts were almost 6 per cent lower than a year ago. But the actual level of starts was almost 18 per cent above the decade average - far better than the performance of any other state or territory on the same criteria.
- Clearly there will always be some subjectivity associated with the rankings. Some people may believe that a certain indicator deserves a higher weight - perhaps considering that unemployment is more important than housing finance. And some will debate the worth of indicators used for assessment. But the fact that eight indicators are used means economic performance is broadly assessed.
- Where available, trend measures of the economic indicators were used to assess performance rather than more volatile seasonally adjusted or original estimates.

Economic growth

- Ideally gross state product would be used to assess broad economic growth. But the data isn't available quarterly. Rather state final demand (household and business spending) was added to exports less imports.
- Western Australia came out on top with economic activity in the June quarter almost 30 per cent above the state's decade average level of output. Next strongest was the other resources-driven state, Queensland. While economic growth in the two states has slowed over the past year as companies decided to mothball new projects, actual activity levels are still well above levels considered 'normal' over the past decade.
- NSW was ranked eighth on economic growth with current economic activity just 11 per cent above its decade-average growth pace. Higher unemployment has led to weak retail spending, construction activity and business investment.

Retail trade

- The measure used was real (inflation-adjusted) retail trade in trend terms with June quarter data the latest available. Monthly retail trade was also assessed (August data available) but broad results didn't vary greatly.
- Coming out on top was Northern Territory with spending in the June quarter 32 per cent above decade average levels. Low unemployment, rising incomes and solid housing activity are key drivers of consumer spending. Queensland was next strongest followed by Tasmania,
- At the bottom of the leader-board was the ACT and NSW with both economies held back by weak construction activity. For NSW both residential and engineering construction have been weak compared with past experience while ACT has been constrained especially by sluggish business spending.

Business investment

- The resources-dependent states of Western Australia and Queensland lead the business investment leader-board. While growth in investment has slowed in both states, it remains positive, lifting the substantial amount of work underway.
- In Western Australia, the amount of private capital expenditure in the June quarter was a stunning 115 per cent above the average levels of the past decade. In Queensland business investment is 72 per cent above 'normal' levels. Simply, there is a lot of work to be done.
- Victoria was in third spot in capex, with activity 42 per cent above the long-term average. In both Western Australia and Victoria, business investment was at record highs in trend terms in the June quarter.
- Despite the global slowdown, capex in all states and territories is above the long-term average except in Northern Territory. The Territory seems to have paid the highest price for the global slowdown with business investment 27 per cent below the average levels experienced over the past decade.

Unemployment

- The smaller states and territories are the major winners in the job stakes. Tasmania leads the way from the Northern Territory and the ACT. In Tasmania the trend rate of unemployment stands at just 5 per cent, well below the 6.9 per cent average level recorded over the past decade.
- Lower housing prices and a cheaper standard of living have led to a boost in population growth, stimulating housing activity and creating jobs.
- In Northern Territory the trend unemployment rate of 4.2 per cent is below the decade average of just over 5 per cent. And in the ACT the unemployment rate stands at 3.5 per cent, below the 3.7 per cent average over the past decade.
- Another of the smaller states, South Australia, is fourth on the unemployment leader-board; its 5.7 per cent unemployment rate is below the 6.0 per cent decade average.
- At the bottom of the pack is Western Australia, its unemployment rate lifting from sensational lows over the past year with the global recession and wind-back in mining activity. The trend rate of unemployment in Western Australia stands at 5.7 per cent, below the 5.0 per cent average rate record over the past ten years.
- Encouragingly in the past month the trend rate of unemployment fell in the large states of NSW and Victoria as well as the ACT. The only increases in unemployment were experienced in the resources-dependent states of Queensland and Western Australia.

Construction work

- The measure used for analysis was the total amount of residential, commercial and building work actually completed in trend terms in the June quarter.
- Despite a slowdown in the residential sector, Western Australia leads all other states and territories when it comes to measuring construction activity compared with longer-term averages. In Western Australia the amount of construction work done in the June quarter was 80 per cent above the decade-average. And importantly activity is still growing, lifting 6 per cent over the past year.
- Behind Western Australia in second spot is the Northern Territory. The Territory may have seen a slowdown in new business investment but construction is still strong, boosted in part by 'lumpy' large-scale projects. Construction work is 60 per cent above decade-averages and work done is up 44 per cent on a year ago - the fastest pace in the nation.
- South Australia is in third place on construction work followed by Queensland. But while work in South Australia is up 22 per cent on a year ago, Queensland work is down 3 per cent.
- Weakest construction work is in NSW with work done in the June quarter just 9 per cent above long-term averages. In trend terms construction work has also actually gone backwards for the past two quarters.

Population growth

- Across the states and territories the current annual rate of population growth was compared with each economy's decade-average growth pace.
- Population growth is fastest in Western Australia (3.1 per cent) followed by Queensland (2.6 per cent). But both states have been consistently leading the rest of the nation, especially over the past three years.
- But top ranking on the population growth leader board is Tasmania. In Tasmania annual population growth stands at 1.0 per cent, the fastest in four years and well above the decade average pace of 0.6 per cent. Next best was Western Australia with its population growth of 3.1 per cent, well above its long-term average pace of 1.8 per cent.
- Somewhat surprisingly NSW was in third spot on population as current annual growth of 1.6 per cent compares with the decade average of 1.0 per cent. In fact as recently as five years ago, population growth was almost a third of current levels at 0.6 per cent.
- At the bottom of the leader-board - and again somewhat surprisingly - is Queensland. Current population growth of 2.6 per cent is only modestly above the 'normal' or decade-average growth pace of 2.3 per cent.
- In other words Queensland is not getting the same boost to its overall economic performance from the change in population growth.

Housing finance

The measure used was the trend number of housing finance commitments and this was compared with the decade-average for each respective state and territory. Housing finance is not just a lead indicator for real estate activity and housing construction but also is an indicator of activity in the financial sector. Unfortunately trend figures on commercial, personal and lease finance are not available for states and territories.
- In top position for housing finance is the ACT. In the past nine months the number of housing finance commitments have accelerated sharply and now stand 35 per cent higher than a year ago. But more importantly the number of commitments is 36 per cent above 'normal' or decade-averages, boosting work for financial institutions, real estate agents and builders.
- South Australia is in second spot for housing finance, with the number of commitments 21 per cent above longer-term averages, particularly driving overall activity in the construction sector, especially in the residential sector.
- Victoria was third on housing finance followed by Queensland. And Queensland is quickly moving up the leader-board with housing finance lifting 37 per cent over the past year - the fastest growth in the nation - ahead of the ACT and NSW.
- At the bottom of the leader-board is Western Australia. While housing finance is again growing in annual terms, it consistently fell over 2007 and 2008. As a result, the number of housing finance commitments is just 2 per cent above the decade-average or 'normal' growth pace.
- Tasmania was in seventh position on housing finance, just behind the Northern Territory.

Dwelling starts

- The measure used was the trend number of dwelling commencements (starts) with the comparison made with the decade-average level of starts. Starts are driven in part by population growth and housing finance and can affect retail trade, unemployment and overall economic growth. However the level of over or under-building in previous years can determine the level of starts.
- But while Tasmania was at the bottom of the leader-board on housing finance, it tops the leader-board on dwelling starts. The number of dwelling starts in the June quarter was 18 per cent above the decade average although the historically high activity levels have retreated in the past nine months. In fact dwelling starts in the June quarter were down 6 per cent on a year earlier.
- Low unemployment and firmer population growth have driven the demand for new housing in Tasmania, also supporting retail spending. It is clear therefore that an economy doesn't need a strong resources sector to drive economic performance. But it does need a driver, such as population growth.
- In second spot for dwelling starts is South Australia. While the trend number of starts has eased over the past nine months, it has been from 24-year highs. Trend dwelling starts in South Australia are currently 4 per cent higher than decade averages.
- The Northern Territory and ACT are in third and fourth spots and both have dwelling starts slightly above longer-term averages.
- At the other end of the leader-board is NSW. Dwelling starts in NSW over 2008/09 fell to the lowest levels in 56 years. In the June quarter the number of dwelling starts was 43 per cent below the decade average. And starts were 27 per cent down on a year ago. Clearly the NSW residential construction sector is depressed. But firmer population growth and low interest rates should drive recovery in coming months.
- Behind NSW in seventh spot is Queensland. While the number of starts in the June quarter was above NSW, it was still 38 per cent below the average levels seen over the past decade. The downturn in the resources sector and the reduced boost from population growth has translated into higher unemployment and a downturn in home building.

Other indicators

- Consumers in all states and territories are currently enjoying real wage gains (wages growing faster than prices). And homeowners are benefiting from rising home prices.
- While Western Australia is experiencing the strongest gain in real wages, house prices are rising only modestly. Figures from RP Data indicate that Perth dwelling prices are up just 1.8 per cent on a year ago.
- Victoria is arguably in the strongest position with real wage growth of 2.8 percentage points and home prices up almost 18 per cent on a year ago.

What are the implications for investors?

- The leader-board of state and territory economies is useful to get a big picture perspective. And certainly the current ranking does make a lot of sense. Tasmania has been more insulated from the global financial crisis and global recession than other state economies. NSW has a more significant financial sector than other states while Western Australia, Queensland, and the Northern Territory have been negatively affected by slower activity in the resources sector.
- Looking ahead, Tasmania will continue to be supported by above-average population growth but activity in the housing sector is already beginning to ease after strong construction activity over the past year.
- Western and Queensland can be expected to move up the leader-board of economies in response to strong activity in China and the easing of the global recession. Improved economic activity should also be expected in NSW and Victoria as financial markets heal and employment recovers. But whether the two largest economies regain economic supremacy will depend on the direction and planning of their respective governments. Overall, though longer-term prospects appear brighter for the resources-dependent states and territories.