Key Points
Domestic growth continues to underwritten by the unwinding of savings accumulated under Covid-19 stimulus. This is especially true of the Resource States where household consumption was basically the sole driver of domestic growth.
Except for New South Wales, where private business investment posted a strong quarter, and the Territories where growth is a little more broad-based, the story is generally one of cautious private investment in the face of withdrawing stimulus.
While domestic factors to be reflecting a “wait and see” attitude across the Federation, a surge in exports across its borders is consolidating growth.
National accounts: what it is, why it matters
The national accounts are the touchstone Australian economic dataset. They give us a picture of the wealth created across the Federation during a quarter year. We summarise this in a single number: Gross Domestic Product (GDP). GDP is added up in three ways:
GDP-E: by expenditure, what some might call the “demand side” of the economy, which includes household and government consumption and investment and international trade.
GDP-O: by output, what some might call the “supply side” of the economy, which adds gross value added by each sector of the economy.
GDP-I: by income, what we might call the “circuit closer”, which adds up income accruing to workers, companies, governments, and landlords.
In this update we will focus on GDP-E because it is the most detailed breakdown by state. In follow-ups, we will focus on GDP-O and GDP-I to round out our analysis.
As always, we use the seasonally adjusted numbers to get a little bit of the volatility stripped out. We also, as is conventional, focus on real GDP, which seeks to hold prices constant across time to get at the underlying volume of production and exchange within the economy.
Again, as always, we like to start by looking at the overall Australian economy. Then we dive into each of the city-states, pairing them as twins: first the Major States (New South Wales & Victoria), then the Resource States (Queensland & Western Australia), then the Festival States (South Australia & Victoria) and finally the Territories (Northern Territory & Australian Capital Territory). We coined the term “Festival States” (in the sense of “Feast”) to call to mind their comparative advantage in food, wine, and general high culture. This gives us a rich view of the makeup of the economy across the Federation and what is driving Australian economic growth.
National growth: driving and restraining forces
Across the Federation, the overall economy gathered a little pace over the June-22 quarter, growing at a yearly rate of 3.62% from a (revised) 2.87% in the March-22 quarter. We would probably consider this a consolidation of gains achieved as the spectre of Covid-19 lockdowns faded.
Figure 1: Growth consolidated over the June quarter as the spectre of Covid-19 lockdowns faded.
Growth across the Federation was powered by strong household consumption and a surge in exports, with a slight kick from public investment. All other categories except inventory created a mild drag on the economy across the Federation, while inventory created a strong drag. This constituted a reversal of its effect from the March quarter and probably reflects firms running down stock acquired in anticipation of supply chain shortages. Notably, government consumption, which had been combining with household consumption to drive growth, began to withdraw.
We might summarise this by saying that, across the Federation, private investment (including inventories) was cautious in the context of an uncertain outlook. Consumption continued to be underwritten by the unwinding of savings accumulated from state and Federal stimulus even while direct support from government consumption winds down. Exports surged on a volumetric basis to exploit global commodity prices.
Figure 2: Growth across the Federation was restrained by cautious private investment and the withdrawal of direct government support but powered by continued unwinding of accumulated household savings and surging exports.
Growth in trade across Australia’s borders significantly eclipsed the contributions made by each domestic state economy. But within Australia’s borders, New South Wales State Final Demand made the largest contribution across the Federation, followed at a distance by Victoria, Queensland and South Australia.
Figure 3: Economic growth across the Federation was powered by export growth, but within Australia’s borders New South Wales posted the strongest contribution to growth by a significant margin.
Major States: New South Wales and Victoria
The two Major States posted somewhat divergent results. In New South Wales, State Final Demand consolidated with 7.77% yearly growth, down marginally from a revised yearly growth of 7.98%. Victoria moderated somewhat more sharply, with growth decreasing from a yearly rate of 12.93% to 4.04%. As a result, New South Wales’ growth remains at a relatively elevated level while Victoria’s has fallen firmly back to within ten-year trends.
Figure 4: State Final Demand growth consolidated in New South Wales to remain at an elevated level relative to the decade, while Victoria's moderated back to within decadal trend growth.
In both states the housing boom is certainly over, with expenditure on new and existing housing dragging on growth. In both states household consumption posted by far the largest contribution to State Final Demand growth as the savings accumulated from state and Federal stimulus continue to unwind, even while direct support from government consumption is withdrawn. In both states public investment provided a complement to household consumption. However, New South Wales and Victoria diverged in private business investment, with private business investment in New South Wales contributing almost as strongly to growth as public.
.Figure 5: Household consumption combined with public and private business investment to overcome restraining forces in NSW, while Victoria was more reliant on continuing unwinding of household savings and public investment.
The Resource States: Queensland and Western Australia
Even more so than the Major States, the Resource States posted divergent results. In Queensland, State Final Demand growth consolidated slightly, increasing from a revised 3.34% yearly in the March quarter to 3.95% yearly. In its sister state of Western Australia however, State Final Demand dropped from a revised 7.47% yearly to just 0.48% yearly.
Figure 6: The Resource States posted divergent results, with growth consolidating moderately in Queensland and dropping substantially in Western Australia.
Interestingly, both states were almost entirely dependent on unwinding household savings to underwrite their growth. In Western Australia every other category of expenditure created a drag on growth, with the strongest drag being from private business investment. In Queensland, housing investment created the strongest drag, but household consumption got an additional boost from public investment to push growth higher. In both states, the housing boom is definitely over, though it had contributed relatively little to growth anyway.
Figure 7: The Resource States were almost entirely dependent on continuing unwinding of household savings for State Final Demand growth, with all categories but public investment in Queensland dragging on growth.
The Festival States: South Australia and Tasmania
Growth consolidated in both of the Festival States. South Australia consolidated from a revised 1.02% yearly to 1.49% State Final Demand growth. Tasmania broke out of a State Final Demand recession to post slight, but positive, yearly growth of 0.56%.
Figure 8: Both Festival States posted a consolidation of growth, with Tasmania breaking out of a State Final Demand recession.
The drivers of growth, however, were quite divergent between the Festival States. In both, household consumption provided the strongest driver, and thus growth was primarily underwritten by ongoing unwinding of household savings accumulated under Covid-19 stimulus. However, in South Australia, this was complemented by government consumption – the only state in the Federation where government consumption drove growth. In Tasmania, household consumption was compounded by private business investment to drive a State Final Demand recovery.
Figure 9: Growth was underwritten by the unwinding of household savings in the Festival States, but in South Australia this was compounded by government consumption, while in Tasmania it was compounded by private business investment.
The Territories: Northern Territory and Australian Capital Territory
The Territories are characterised by substantial volatility compared to the States, with a shallower market and more contingency upon government (military in Darwin, Federal administration in Canberra). Both Territories saw a decline in State Final Demand growth, with the Northern Territory declining from a revised 10.43% yearly growth to -0.56% and the ACT declining from 10.82% to 0.59%.
Figure 10: Growth declined in both Territories, with the Northern Territory posting negative growth.
In both Territories, it was the withdrawal of direct support from government consumption that overcame driving forces in all other categories (except housing transfers in the ACT) to moderate growth. Growth factors were otherwise broad based and the Territories would have seen moderate growth but for the withdrawal of government consumption.
Figure 11: In both Territories the primary restraining force overcoming otherwise broad-based growth was the withdrawal of direct government support.
Conclusion
Growth consolidated across the Federation during the June quarter as the spectre of Covid-19 lockdowns faded. Growth was restrained by cautious private business investment and the withdrawal of direct government support. But it was powered by continued unwinding of accumulated household savings and surging exports. Across the Federation, growth was powered by exports, but within Australia’s borders it was concentrated in New South Wales, which contributed the most to growth by a significant margin.
Across the Federation there were fairly strongly divergent results:
Major States: State Final Demand consolidated in New South Wales to remain at an elevated level relative to the past decade, while Victoria’s moderated to decadal trends. The contribution made by household consumption was complemented by public investment in both states, but also equally strong private business investment in New South Wales.
Resource States: Domestic growth consolidated moderately in Queensland, but dropped substantially in Western Australia. Both states were almost entirely dependent on the continuing unwinding of household savings, complemented in Queensland by public investment.
Festival States: Both Festival States posted a consolidation of State Final Demand growth, with Tasmania breaking out of a domestic recession. The unwinding of household savings underwrote this in both states, but in South Australia this was complemented by government consumption, while in Tasmania it was complemented by private business investment.
Territories: Both Territories saw a decline in domestic growth, with the Northern Territory posting negative growth. In both this was because the withdrawal of direct government support overcame otherwise broad-based growth.
Two key themes emerge from the June Quarter. First, domestic growth continues to underwritten by the unwinding of savings accumulated under Covid-19 stimulus. This is especially true of the Resource States where household consumption was basically the sole driver of domestic growth. Except for New South Wales, where private business investment posted a strong quarter, and the Territories where growth is a little more broad-based, the story is generally one of cautious private investment in the face of the withdrawal of direct government support.
The second key theme is that, while domestic factors seem to be reflecting a “wait and see” attitude across the Federation, a surge in exports across its borders is consolidating growth. So, as the economy transitions away from Covid-19 stimulus toward more broad-based growth, we are being tided over by the global commodities boom.
The views expressed in this note are those of the author alone and in no way reflect the views of his employer or any other party.