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Economic growth is expected to slow right across Australia in 2023–24 with the rebound from COVID-19 “now firmly in the rearview mirror”, says NAB.
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Lower consumption to drive ‘slower growth across all states’
04 August 2023
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A slowdown in consumption is expected to continue across all states this financial year as the impact of rate rises continue to flow through, the NAB State Economic Overview for June says, with economic growth to be below trend.
“Under the surface, a range of important dynamics are at play. The rebound has supported very strong employment growth, and labour markets remain historically tight across the country, driving wage growth to over 4 per cent in WA and Tasmania and over 3.5 per cent elsewhere,” the overview said.
“Whether this remains the case as economic growth slows is a key question for the outlook, with some softening likely in most cases.”
The very different economic experiences of the past few years have delivered very different budget positions across state governments.
“The legacy of COVID has left the NSW and Victorian governments with significant deficits, while elevated commodity prices have delivered revenue windfalls for WA and Queensland. Temporary spending on cost-of-living relief has also been a common theme,” the major bank said.
NSW
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Economic growth has slowed in NSW since late 2022 after a solid post-pandemic rebound.
However the first quarter saw a rebound in business investment and a positive outturn for consumption, NAB said.
The labour market remains strong with the unemployment rate below 3 per cent and job vacancies at near-term strength.
"Higher frequency data suggests that growth likely remained soft in the second quarter with business conditions softening substantially – albeit from very high levels – and forward orders pulling back,” the overview said.
“That said, capacity utilisation remains high. On the consumer side, nominal retail sales have declined by around 1 per cent over the second quarter – pointing to a sizeable decline in real terms for consumption in Q2. The bright spot in the near term will likely be both business and public sector investment with a large pipeline of both engineering and non-residential building in train.”
NSW has delayed the budget for 2023–24 to mid-September which will provide an update on the pressures faced by the state as the impact of rates and inflation flows through.
Victoria
Consumption is also slowing in Victoria as rate rises and inflation weigh on households.
Household consumer growth was modest in the first quarter, up just 0.3 per cent as growth in hospitality and housing consumption was offset by falling goods spending.
“Nominal retail trade data suggest further slowing in the second quarter and consumer confidence is mired at very low levels. We expect consumption to soften further in the second half of 2023 as higher rates weigh on households,” NAB said.
“The outlook for investment is also clouded. Business investment picked up in Q1, partly driven by energy and road projects, as did public investment as the government’s building program continued. However, business confidence in the NAB Monthly Business Survey is negative.”
The population surge has strained the housing market, with Melbourne house prices up 2.4 per cent from their February lows despite recent rate rises.
“Rents also continue to rise, now up 5 per cent year on year to be well above their pre-COVID levels,” the overview said.
While the strength of employment and resilience of house prices will help the state government’s budget, it remains under significant pressure in the wake of COVID-19 with net debt at over 20 per cent of GSP, the overview said.
“As a result, the recent 2023–24 budget contained a number of revenue measures designed to stabilise the budget and projected the operating position to improve to a small surplus by 2025–26,” NAB said.
“The government has also signalled it may delay some planned infrastructure spending which may further ease the pressure on the budget as major projects, including the Metro and West Gate tunnels, wrap up in the next two years. Still, net debt is expected to continue growing over the forecast period to over 30% of GSP by 2026–27.”
Queensland
Queensland’s economy has continued to growth despite slowing consumption growth off the back of population growth, mining investment and public infrastructure spending.
“The growth in Q1 was largely due to mining business investment, although goods export volumes declined slightly,” the overview said.
“Agricultural exports are likely to soften, with the La Nina cycle ending and an El Nino expected to follow, diminishing crop yields as a result. In terms of services exports, short term visitor arrivals continue to gradually rise but remain around 60% of their pre-COVID level.”
More recent nominal retail spending has been flat and business conditions have declined over the first half of the year, suggesting further softening in real spending, according to the major bank.
“Very elevated commodity prices, particularly for coal, have supported the state’s economy and helped to deliver the state budget a $12 billion operating surplus for 2022–23,” it said.
“The budget expects the surge in coal royalties to unwind in the coming year, making the large surplus a temporary event and the impact of cost-of-living relief measures, see a $2b deficit for 2023–24, followed by a return to balance.”
The expected fall in coal royalties aligns with price movements, which are now well down from their 2022 peaks.
“Upside pressures in global energy markets should keep prices at elevated levels relative to pre-COVID, so there may be some upside for state revenues. A significant infrastructure investment program, including in health, energy and water as well as Olympic Games preparations, will see net debt begin to rise in coming years, albeit at very low levels,” the overview said.
“Indeed, at $46.9b by 2026–27, the forecast level of net debt would only be around 11 per cent of GSP, well below the level in some other jurisdictions.”
Western Australia
Western Australia’s economy performed comparatively strongly in early 2023, buoyed by a public sector that has benefited from stronger-than-expected royalties from iron ore exports, said NAB.
“While consumption growth was modest in Q1, it followed robust growth in Q4,” the overview said.
“Labour market conditions remain tight and wages growth has outpaced most of the country, although softer Chinese demand for the state’s resources could be a headwind going forward.”
WA’s state budget showed a large increase in its operating surplus for 2022–23 – up to $4.2 billion from $1.8 billion in the mid-year review, driven primarily by stronger royalties resulting from higher-than-expected iron ore prices along with a modest boost from residential property transactions.
“The outlook for the operating balance is slightly weaker – reflecting increased expenditure on a cost-of-living package and investment in health, education and disability services – but remains in the black across the outlook period,” the overview said.
“Despite these operating surpluses, the state’s net debt is forecast to edge up across the outlook period – reflecting an increase in the government’s Asset Investment Program. It is worth noting that the net debt level forecast for 2027 is below the peak recorded in 2019.”
South Australia
Economic growth is South Australia has slowed and is likely to come under further pressure this financial year.
The state’s 2023–24 budget sees a delayed return to surplus with 2022–23 now expected to be in deficit.
“The expectation of a 2023–24 surplus is despite almost $1 billion of net policy measures as revenue has been buoyed by the current strength of the economy”, the major bank noted.
“Beyond 2024–25, maintenance of the surplus is predicated on greater spending restraint. We are a bit more pessimistic on the outlook for the economy than the Budget assumptions which could put pressure on revenue (relative to expectations), although Budget plans can be adjusted.”
Despite the return to an operating surplus, NAB said that net debt is expected to continue to grow strongly reflecting a large infrastructure investment program.
“General government net purchases of financial assets are expected to increase 34 per cent in 2023–24 (cash basis) and, as a proportion of GSP, are expected to almost double their 2018–19 level by 2026–27,” it said.
Tasmania
The Tasmanian economy has held up well after relatively strong performance in the pandemic period.
However, NAB expects that growth will slow for the state as high rates and inflation weigh on the consumer, and business investment continues to normalise from high levels.
The state has also seen less of a boost from the rebound in migration and housing indicators have generally seen softer outcomes through the first half.
“A significant contrast between Tasmania and the other states has been the outcomes in the housing market. While most other states have now seen solid gains in prices since a capital-city wide trough in February, Hobart dwelling prices have remained weak,” the overview said.
“The rental vacancy rate has risen sharply since late 2022 and rents are up just 1.3 per cent year on year – including modest falls in recent months.”
The government continues to focus on budget sustainability and rebuilding fiscal buffers.
“While the operating surplus came in significantly better than expected for 2022–23 ongoing deficits are forecast over each of the next two years before a small surplus is achieved in 2025–26 with net debt rising to $5.6 billion over the forward estimates,” NAB said.
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