The New South Wales economy represents about one-third of Australia’s gross domestic product (GDP). The State has a diversified economic base encompassing the construction, finance, telecommunications, high value manufacturing, business services and transport sectors.
New South Wales is rated AAA by two leading international rating agencies, Moody’s Investors Service and Standard & Poor’s. These ratings reflect the strong balance sheet of the State and the disciplined fiscal strategy adopted by the Government over the past decade. The total State sector net debt declined significantly from 11.5 per cent of gross state product (GSP) in 1995 to 4.7 per cent in June 2006, although it has increased since then to 6.2 per cent of GSP, reflecting a substantial Government program of capital infrastructure projects over the next decade. The major projects announced by the Government include rail and road transport, water, and electricity infrastructure.
The New South Wales economy performed strongly in 2007/08, with State final demand growing by 4.25 per cent, employment increasing by 2.5 per cent and the unemployment rate declining to a generational low of 4.5 per cent. Growth in the economy is expected to slow in 2008/09 under the weight of weaker global conditions, although Asian demand for resources will be a buffer.
Economic performance exhibited a distinct change of pace during 2007/08. In the first six months, demand strengthened, supported by stronger terms of trade, reduced income taxes and increased Commonwealth spending. As a result, inflationary pressures increased and monetary policy was tightened. In the second half, world financial markets and global economic prospects turned sharply downward. Domestic demand appears to have slowed in response to tighter monetary policy and tighter credit markets.
Economic trends in New South Wales differed somewhat from the national pattern. At the year’s outset, the State’s performance was modest relative to the rest of Australia, with low direct exposure to the resources sector and protracted drought. However, by mid-year, outcomes had begun to improve on the back of solid corporate sector performance, rising household disposable income and spending, and evidence that the drought was finally nearing an end. This improvement was not sustained in the final six months.
Consumer spending increased strongly in the first half of 2007/08, with annual growth averaging 4.1 per cent in the six months to December 2007, up from 3 per cent in the same period a year earlier. Consumer demand was boosted by lower taxes, strong labour market conditions, rising terms of trade and an improving sharemarket. Consumption appeared to soften in early 2008 as the RBA increased interest rates in an attempt to bring inflation back to the 2-3 per cent annual target. Consumer sentiment declined steeply, car sales growth slowed and retail turnover flattened. Consumer unease was fed by rising interest rates, higher prices (particularly for food, rents and petrol), sharemarket losses and a stream of negative economic news from abroad.
Dwelling construction showed signs of recovery during the first half of 2007/08, with modest gains in new construction and a strong lift in alterations and additions in the December quarter. Progress seemed to falter in early 2008, with weaker trends in housing finance and dwelling approvals in response to higher interest rates and tighter credit conditions, although, against a background of strong population growth, rising rents and very tight vacancy rates attested to strong underlying demand in the housing market.
Business investment increased at a strong annual rate of 10.1 per cent during the first half of 2007/08, with solid contributions from both non-residential construction and equipment investment. Capital expenditure plans surveyed in December suggested investment growth would remain strong in the remainder of 2007/08 but weakening global economic prospects and tighter financial conditions during the second half trimmed back these expectations, as reflected by trends in private surveys of business confidence.
With stronger private consumption and public investment offsetting the moderate performance of dwelling investment, State final demand is estimated to have increased by 4.25 per cent in 2007/08, up from 2.3 per cent in the previous year.
The recovery from drought predicted in early 2007 by the Australian Bureau of Agricultural and Resource Economics and the Bureau of Meteorology did not eventuate. The absence of follow-up rains reduced winter crop production to the lowest since 1994/95. It also forced the suspension of irrigation water allocations and the abandonment of most summer rice production. Instead of the expected 0.5 percentage point contribution to GSP growth, weak rural production is likely to have detracted again from State exports and output in 2007/08.
The labour market made stronger than expected gains, with New South Wales employment increasing by an estimated 2.5 per cent and the unemployment rate declining to an estimated average 4.5 per cent in 2007/08 from 5 per cent in 2006/07. In year-average terms, employment growth to the March quarter 2008 was strongest in transport and storage, health and community services, and manufacturing.
Wage pressures remained moderate during 2007/08 despite a further decline in unemployment and skilled labour shortages in some sectors. Wage pressures in the State’s resources and infrastructure sectors did not flow on to the broader economy. Growth inthe Wage Price Index was 3.7 per cent in the year to March 2008, marginally less than the 3.8 per cent increase in the year to March 2007.
Inflation, as measured by through-the-year growth in the Sydney CPI, increased from1.7 per cent per annum in June 2007 to 3.9 per cent per annum in March 2008. Accelerating economic activity, particularly in the resources sector, bid up demand for labour and tightened capacity constraints in the national economy, lifting through-the-year underlying inflation from 2.8 per cent per annum in June 2007 to 4.3 per cent per annum in March 2008.
Outlook for 2008/09
NSW Treasury forecasts suggest the Australian economy will start 2008/09 with high inflation and tight monetary policy, offset by stimulus from tax cuts and rising terms of trade. Over the year ahead, the Australian economy will face risks and challenges. Tight world financial markets and slower growth in the world economy will provide strong headwinds for the domestic economy. The slower domestic growth outlook will allow policy makers to lower interest rates and introduce spending measures aimed at supporting the economy.
With less direct exposure to the relatively robust Asian region than the major resource-oriented States, the New South Wales economy is more dependent on a successful ‘soft landing’ in North America and Europe, restoration of liquid credit markets and an easing of domestic monetary policy. Household income growth will be supported by government spending, lower interest rates and tax cuts, notwithstanding slowing employment growth. On balance, the most likely outcome for the economy is for economic growth to be below trend for the year.
Challenges for the New South Wales economy in the year ahead are likely to be greater than for some other States. This reflects a relative exposure to interest rates because of higher house prices and household gearing. It also reflects the State’s industry structure, with more reliance on property and financial services than on resources.
Based on NSW Treasury Forecasts, New South Wales economic output (GSP) growth and state final demand are expected to slow; household consumption and business investment growth will be more subdued, but public sector investment will remain strong, and net exports will improve.
