STATE ECONOMIC HANDBOOK MARCH 2017

AUTHORS

Riki Polygenis James Glenn Amy Li Phin Ziebell Head of Australian Senior Economist Economist Economist Economics +61 2 9237 8017 +61 3 8634 1563 +61 (0) 475 940 662 +61 3 8697 9534

Photo Mai Thai

2

KEY POINTS Leaders solid and laggards stabilising • Growth will remain solid across the large south-eastern states, while there are signs of

stabilisation in mining states as the end of the downswing in resource-related investment approaches.

• Looking forward, Victoria and New South Wales will remain ahead of the pack in terms of state final demand growth, although Queensland will experience the strongest growth overall thanks to resource exports. While momentum has slowed a little from the rapid growth rates in 2015-16, Victoria and NSW will continue to benefit from buoyant population growth (especially Victoria), strong services activity and infrastructure expenditure. Non-mining business investment in these states has also started to strengthen and will gradually pick up speed, although this will be offset by residential construction peaking and no longer contributing as fervently to growth. The ACT economy is also gradually improving thanks to a more stable labour market and stronger housing demand.

• Queensland and WA (and to a lesser extent NSW) are currently receiving an income boost from higher bulk commodity prices, which are flowing through to corporate profits and state government revenue. Resource export volumes will also add strongly to real gross state product in Queensland, WA and the NT as large (mostly LNG) projects are completed through 2017. These states and territories are also well advanced through the downswing in mining investment, although the outlook for mining investment is unlikely to improve given our expectation that the current surge in bulk commodity prices will be temporary. Job losses in mining (and weaker population growth) will continue to pose a challenge to domestic demand, particularly dwelling construction in mining regions and consumer spending in WA, the NT, and parts of Queensland. That said, stabilisation in some high frequency data indicates that the worst of the downturn may be behind us.

• Tourism spending (both domestic and international) and education exports will continue to expand in most states and territories, although the pace of growth is easing somewhat and will be dependent on the path of the Australian dollar.

• Infrastructure spending is also ramping up, particularly in NSW and Victoria, financed in part by strong growth in stamp duty revenue and royalties in some states. The SA government is attempting to utilise infrastructure spending to offset the impact of the closure of auto manufacturing and until shipbuilding activity picks up. That said, for SA, as for Tasmania, demographics and a concentrated industry structure will remain challenges.

• In 2016, agriculture enjoyed a generally wet winter and spring, especially in NSW, Victoria, Queensland, SA and Tasmania, although WA was dryer. Looking ahead to 2017, the Bureau of Meteorology forecasting a hot, dry autumn for the whole continent (except far north Queensland and northern NT) and likely El Nino by winter – a worrying outlook for all farmers.

• A snapshot of the outlook for each state and territory is on the following page. Links to individual handbooks for each state and territory are on the right.

CONTENTS 3 | Summary outlook and forecasts 4 | Charts LINKS TO INDIVIDUAL STATE PACKS New South Wales Victoria Queensland Western Australia South Australia Tasmania Australian Capital Territory Northern Territory

GROSS STATE PRODUCT FORECASTS Annual % change

0

1

2

3

4

5

6

7

NSW VIC QLD SA WA TAS NT ACT

2013-14 2014-15 2015-16 (f)

2016-17 (f) 2017-18 (f)

3

SUMMARY OUTLOOK and forecasts • The New South Wales economy will remain neck and neck with Victoria as

one of the country’s leading economies in terms of state final demand. While growth is expected to moderate and the latest partial data is indicating a mixed picture, we expect strong population growth, infrastructure spending and a further recovery in non-mining business investment to support growth. The anticipated peak in the housing construction boom will pose a challenge to growth going forward.

• Victoria will also remain a standout across the states despite some moderation expected, with growth neck and neck with NSW. Employment and population growth (particularly from overseas and interstate migration) is expected to continue, while infrastructure spending, services activity and exports and a gradual recovery in non-mining investment will be key pillars of growth. Residential building approvals have peaked, and dwelling construction is not expected to add as significantly to growth going forward.

• South Australia will experience moderate growth, with infrastructure spending and shipbuilding providing some offset to the impact of auto manufacturing closures this year. While employment and consumer spending are holding up for now, long-term challenges such as the narrow industrial base, ageing population and negative interstate migration will weigh.

• The Australian Capital Territory economy has strengthened, with greater stability in public sector employment supporting population growth and housing demand and construction. We expect moderate growth going forward and low unemployment.

• Queensland will experience the strongest rate of economic growth in 2016-17 owing to a surge in LNG exports and strength in tourism and education exports. Business and labour market conditions however will remain mixed, with south-eastern Queensland outperforming regional areas, and falling mining investment will drag on state final demand. High coal prices are boosting nominal income growth and state government revenues, although the flow on effects to investment and employment will be limited given the temporary nature of the commodity price surge.

• The mining cycle continues to dominate economic trends in Western Australia, although the unexpected partial rebound in commodity prices since last year adds to the uncertainty around the outlook. Overall, we expect very weak real GSP growth in 2016-17 and a moderate rebound in 2017-18 as LNG exports add to growth. The current surge in iron ore prices is unlikely to spur additional investment or employment, but is having a positive impact on government finances.

• The Tasmanian economy has slowed into 2016-17 despite strength in tourism, agricultural and fisheries industries, although should improve moderately into 2017-18. An ageing population, low levels of educational attainment and a concentrated industry structure remain headwinds.

• In the Northern Territory, employment, wages, household consumption and dwelling prices are starting to struggle as the Icthys LNG project approaches completion. With NT’s growth base narrow, these challenges will intensify although export volumes will boost GSP growth in 2017-18.

NAB growth and unemployment rate forecasts for the states

14-15 15-16 16-17f 17-18f 14-15 15-16 16-17f 17-18fNSW 2.6 3.5 2.7 2.9 5.9 5.4 5.1 5.3VIC 2.6 3.3 2.7 2.9 6.4 5.9 5.7 5.7QLD 1.2 2.0 3.5 3.5 6.5 6.2 6.2 5.8SA 2.0 1.9 0.8 2.0 6.9 7.3 7.0 7.0WA 3.6 1.9 0.5 2.8 5.4 6.0 6.5 6.3TAS 1.3 1.3 1.0 2.0 6.9 6.5 6.5 6.5NT 2.0 2.7 1.5 5.0 4.2 4.2 4.0 4.8ACT 1.3 3.4 2.3 2.5 4.5 4.5 4.3 4.3Australia 2.4 2.7 2.1 3.0 6.2 5.9 5.7 5.7

Unemployment RateGross State Product YoY

BUSINESS SURVEY DATA SHOWING STABILISATION IN MOST STATES … although Queensland has pulled back

Despite robust confidence levels, measures of capital expenditure expectations have eased off a little in most states. That said, capacity utilisation rates are above historical averages in NSW, Vic and SA which suggests upside risk to business investment in those states (see page 5 for further discussion). The outlook for investment in WA and some parts of Qld is weak.

Source: NAB, ABS 4

The non-mining states of NSW, Victoria and Tasmania continue to boast the strongest business conditions, while conditions have stabilised at low levels in WA and SA. Qld continues to underperform in terms of business conditions, though remains one of the most confident alongside Vic and NSW.

Capacity utilisation is now above average in most states with the exception of Qld and WA.

BUSINESS CONFIDENCE BY STATE Trend

CAPACITY UTILISATION BY STATE Percentage point deviation from LR average

-4.0

-3.5

-3.0

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

NSW Vic Qld SA WA Australia

BUSINESS CONDITIONS BY STATE Net balance, 3mma

-40

-30

-20

-10

0

10

20

30

40

50

2008 2010 2012 2014 2016 2018 2009 2011 2013 2015NSW Vic QLD SA WA Tas Australia

CAPITAL EXPENDITURE EXPECTATIONS BY STATE (NAB SURVEY) Next 12 months, net balance

-40

-30

-20

-10

0

10

20

30

2008 2010 2012 2014 2016 2008 2010 2012 2014 2016

NSW Vic QLD SA WA Tas Australia

-30

-20

-10

0

10

20

30

40

50

60

2005 2008 2011 2014 2005 2008 2011 2014NSW QLD SA Tas Vic WA Australia

CONSTRUCTION AND INVESTMENT - Dwelling construction will add less to growth in large SE states, while declines in mining investment easing

expenditure expectations suggest a pick up in 2017-18 in NSW and to a lesser extent Victoria. This figures only partly incorporate public infrastructure projects, which will be largely (though not entirely) publicly funded. Infrastructure spending will add the most to growth in NSW, Vic and SA.

Source: ABS 5

Residential building approvals have peaked in all states. This suggests that dwelling construction will not add as significantly to growth in Victoria (even though activity will remain at a high level), and may start to decline in NSW and Qld, and continue to decline in WA. There may be some offset from non-dwelling construction, with non-residential building approvals trending upwards across most states. Capital

RESIDENTIAL BUILDING APPROVALS BY STATE Thousands, rolling annual

NON-RESIDENTIAL BUILDING APPROVALS BY STATE $m

BUSINESS INVESTMENT BY STATE Year-ended % change

CAPITAL EXPENDITURE, ACTUAL & EXPECTATIONS BY STATE (ABS) $bn, based on previous realisation ratio

0

10

20

30

40

50

60

70

NSW VIC TAS SA QLD WA

2012-13 2013-14 2014-15 2015-16 2016-17 (e) 2017-18 (e)

0

200

400

600

800

1000

1200

2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015NSW Vic Qld SA WA Tas (nsa)

$m

0

1000

2000

3000

4000

5000

6000

7000

8000

2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015NSW Vic Qld SA WA Tas

Units

-80

-60

-40

-20

0

20

40

60

80

2000 2009 2000 2009NSW Vic Qld SA WA Tas

%

NAB CUSTOMER SPENDING BEHAVIOURS BY STATE Regional areas outperforming metro in most states and territories

Spending was dominated by the Eastern states - with NSW, VIC and QLD accounting for around 80% of total spending. Sydney, Melbourne and Brisbane accounted for over half (50.1%) of total NAB customer spending.

Cities accounted for 64% of all spending and regions 36%. Cities accounted for the biggest share of spending in all states, particularly Adelaide (78%), Perth (77%), and Melbourne (75%). Spending in Regional areas accounted for a comparatively bigger share of total state spending in TAS (50%), QLD (55%) and NSW (40%).

Source: NAB 6

In a new report NAB has explored the spending behaviours of our customers. By examining around 4 million daily transactions, we show where spending is growing fastest and in which industry groups. Given the size of NAB’s customer base, this data provides a strong indication of national and regional trends. Key findings include: By capital city area (based on ABS definitions), spending growth was fastest in

Hobart (4.1%), Sydney (3.9%) and Melbourne (3.7%) and slowest in Perth (-0.4%) and Brisbane (1.7%). In regional areas, it was fastest in NSW (4.7%) and VIC (3.7%) and slowest in NT (-1.4%) and WA (0.7%).

NAB CUSTOMER SPENDING BEHAVIOURS Q4 2016

CONSUMER SPENDING AND DRIVERS OF HOUSEHOLD INCOME A mixed picture given varying employment and income trends

High frequency data on consumer spending has been mixed and volatile however. Trend growth in retail sales is currently very strong in Victoria, the ACT and SA, consistent with strong employment growth in those states. However it is low in NSW, and Queensland where employment has been weak, and negative in NT as population growth slows (see page 8).

Source: ABS, NAB 7

The pace of growth in household consumption has slowed to a moderate pace across most states and territories, in line with subdued growth in household incomes and reflecting subdued growth in wages (see chart on bottom RHS of average compensation of employees). The main exception is Queensland, where household consumption growth has picked up moderately and average wage growth has improved in recent times.

RETAIL TRADE BY STATE m/m % change, trend

HOUSEHOLD CONSUMPTION BY STATE y/y % change, trend

AVERAGE COMPENSATION OF EMPLOYEES BY STATE y/y% change, trend

-10

-6

-2

2

6

10

14

18

22

26

-10

-6

-2

2

6

10

14

18

22

26

2006 2009 2012 2015 2007 2010 2013 2016

NSW Vic QLD SA Tas NT ACT WA

EMPLOYMENT GROWTH BY STATE y/y % change, trend

-1

-0.5

0

0.5

1

1.5

NSW VIC TAS ACT QLD SA WA NT AUS

Non-mining States Partly Mining Mining AUS

-4

0

4

8

12

16

20

-4

0

4

8

12

16

20

2001 2004 2007 2010 2013 2016 2003 2006 2009 2012 2015

NSW Vic QLD SA

Tas NT ACT WA

-6

-4

-2

0

2

4

6

8

2000 2003 2006 2009 2012 2015 2000 2003 2006 2009 2012 2015

NSW VIC QLD SA WA TAS NT ACT

LABOUR MARKET AND DEMOGRAPHICS Shifts in population growth preventing larger changes to unemployment

Interstate migration has also started to pick up in Queensland while it is negative WA, the NT and SA; in WA, this is helping to prevent a more marked rise in unemployment as mining employment subsides, while slower population growth has seen the SA unemployment rate decline somewhat. Looking forward, the unemployment rate is expected to be broadly stable in most states and territories, with the exception of Qld where it should improve modestly, and the NT where it will rise further (see p2 for forecasts).

Source: ABS, Seek 8

Population growth has remained strong in Victoria and NSW. Victorian population growth in particular has been supported by positive net interstate migration and overseas migration, leading to the unemployment rate remaining stubbornly high despite very strong employment growth (see chart on p7). Meanwhile the unemployment rate in NSW has declined despite poor employment growth, with the labour force participation rate declining.

POPULATION GROWTH BY STATE Annual change, 000s

SEEK JOB ADVERTISEMENTS BY STATE Index

UNEMPLOYMENT RATE BY STATE % of labour force

INTERSTATE MIGRATION BY STATE 000s, 12-month rolling sum

-20,0000

20,00040,00060,00080,000

100,000120,000140,000

1990 1994 1998 2002 2006 2010 2014 1991 1995 1999 2003 2007 2011 2015

NSW VIC QLD SA

WA TAS NT ACTPersons

0.020.040.060.080.0

100.0120.0140.0160.0180.0

2002 2005 2008 2011 2014 2017 2004 2007 2010 2013 2016

NSW VIC QLD SA

WA TAS NT ACT%%

2

3

4

5

6

7

8

2

3

4

5

6

7

8

2006 2008 2010 2012 2014 2016 2007 2009 2011 2013 2015

NSW VIC QLD SA TAS ACT NT WA%%

-10

-5

0

5

10

15

-60

-40

-20

0

20

40

60

1982 1988 1994 2000 2006 2012 1900 1987 1993 1999 2005 2011 1900

NSW VIC QLD SA WA TAS NT ACT

EXPORT EARNINGS CONTINUE TO SURGE …led by LNG and services export volumes and a (temporary) spike in bulk commodity prices

Source: ABS, NAB 9

Estimates of merchandise export earnings in WA and Qld have started to pick up in response to current strength in coal and iron ore prices. Our estimates of contracted LNG supply suggests a surge in export volumes in Qld, WA and the NT. Meanwhile, most states will continue to benefit from stronger services exports including education exports and foreign and domestic tourism, although the pace of growth in visitor arrivals and average spend is likely to slow a little and is dependant on the AUD.

INTERNATIONAL MERCHANDISE EXPORT EARNINGS BY STATE

LNG EXPORTS, CONTRACTED SUPPLY Million tonnes per quarter

SHORT-TERM VISITOR ARRIVALS BY STATE State where spent most time, 000s, 12mma

NAB RURAL COMMODITIES INDEX AND STATE INDICATORS Index value, 2010 = 100

0

5

10

15

20

25

0

50

100

150

200

250

300

NSW

WA

VIC

QLD

SA

NT

TAS ACT

0

0.2

0.4

0.6

0.8

1

1.2

0

2

4

6

8

10

12

1989 1993 1997 2001 2005 2009 2013 1992 1996 2000 2004 2008 2012 2016

$ billion

WA QLD NSW VIC SA NT TAS ACT

$ million

0

2

4

6

8

10

12

14

16

18

20

2015 2016 2017 2018 2019

Wheatstone (WA)

Prelude Floating (WA)

Pluto (WA)

Ichthys (NT)

Gorgon (WA)

GLNG (QLD)

Darwin (NT)

QCLNG (QLD)

Browse (WA)

North West Shelf (WA)

APLNG (QLD)

90

100

110

120

130

140

150

160

170

2010 2011 2012 2013 2014 2015 2016 2017

National NSW VICQLD WA SA

Agriculture enjoyed a generally wet winter and spring, especially in NSW, Vic, Qld, SA and Tas, although WA was dryer. The Bureau of Meteorology is however forecasting a hot, dry autumn for most of the continent in 2017which will be problematic for most areas, although WA has flooded of late. In addition, our rural commodities price index has declined for most states which will weigh on farmer earnings.

PROPERTY MARKETS AND FISCAL OUTLOOK Current momentum means upside risk to house price forecasts. Budget outlooks have improved slightly.

The commercial property index also suggests a solid outlook for Victoria and NSW. While soft in Qld and NT, and negative in WA, it is expected to improve modestly in 12 months and 2 years time. Operating budget balances in eastern states are strong owing to strong population growth and housing market activity, while the budget position in mining states is looking a little healthier (especially in 2016-17) thanks to resurgent coal and iron ore prices (a support which is temporary in our view).

Source: NAB, ABS, individual state budget papers 10

Growth in house prices has picked up strongly in Sydney and Melbourne in late 2016 and early 2017. While we expect some moderation through 2017, current momentum does suggest upside risks, particularly in Victoria where the government has recently announced a stamp duty exemption or reduction for first home buyers buying a property for under $600K and a reduction for those between $600-$750K. Price growth for apartments is likely to be softer, and negative in Victoria and Brisbane where the supply response will be greatest. The outlook for houses and apartment prices remains negative in Perth, and subdued in Adelaide.

RESIDENTIAL PROPERTY SURVEY Average Survey House Price Expectations (annual % change)

COMMERCIAL PROPERTY SURVEY Index

NAB ECONOMICS DWELLING PRICE FORECASTS NAB House & Unit Price Forecasts (annual % change) BUDGET BALANCE BY STATE

Index, 2010=100

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

5000

NSW VIC QLD SA WA TAS NT ACT

15/16f 16/17f 17/18f 18/19f 19/20f

-10-505

101520

2014 2015 2016 2017 F

Houses Units/apartments

-2.0

-1.0

0.0

1.0

2.0

3.0

VIC

NSW QLD

Au

stra

lia

SA/N

T

WA

VIC

QLD

NSW

Au

stra

lia WA

SA/N

T

Q4'15 Q3'16 Q4'16

Next 12 months Next 2 years

-80

-60

-40

-20

0

20

40

60

80

Q3'16 Q4'16 Next Qtr Next 12 mths Next 2 yrs

Australia Victoria NSW Qld SA/NT WA

54%

56%55%53%52%51%50%

55%54%51%

15%

14%16%

10%15%16%

13%

13%15%

17%

31%

29%29%37%33%33%38%

32%31%32%

Australia

QLDNSW/ACT

SA/NTVICWATAS

Regional CityCapital City

Rural Town/Bush

… BUT AUSTRALIANS FEAR THE LANDSCAPE IN 10-YEARS TIME

LIFE IN THE “LUCKY COUNTRY” Is Australia a great place to live and do business, and will that continue?

Source: ABS, NAB 11

NAB recently released a report investigating whether Australians find Australia a great place to live and do business and their optimism for the future. Unfortunately, while most Australians and businesses currently view all Australian states and territories as a great place to live (9 out of 10) and to do business (8 out of 10), they are not so optimistic about the 10-year outlook. For further details about what Australians value, please see the detailed report.

9 IN 10 OF US AGREE AUSTRALIA IS A GREAT PLACE TO LIVE 88%

92%91%89%88%

85%84%

90%90%

87%

Australia

SA/NTQLD

NSW/ACTWATASVIC

Regional CityRural Town/Bush

Capital City

WHAT DO BUSINESSES VALUE? 66%

48%47%

41%39%

33%27%

26%25%24%24%24%

22%20%20%

18%15%

10%9%8%7%

6%6%4%

2%

0% 20% 40% 60% 80%

EconomyAsia

PopulationFinance

WorkforceGovernment

InfrastructureEase of starting a businessEntrepreneurship/Start-up

InnovationAir

Governance & RegulationTelecommunications

PortsIP

ResearchRoads

Federal-State relationsIndustrial relations

IncentivesFinance/tax

RailNOT a great place

OtherDon't know

Group Economics Alan Oster Group Chief Economist +61 3 8634 2927 Jacqui Brand Personal Assistant +61 3 8634 2181 Australian Economics and Commodities Riki Polygenis Head of Australian Economics +(61 3) 8697 9534 James Glenn Senior Economist – Australia +(61 2) 9237 8017 Vyanne Lai Economist – Australia +(61 3) 8634 0198 Amy Li Economist – Australia +(61 3) 8634 1563 Phin Ziebell Economist – Agribusiness +(61 4) 75 940 662 Industry Analysis Dean Pearson Head of Industry Analysis +(61 3) 8634 2331 Robert De Iure Senior Economist – Industry Analysis +(61 3) 8634 4611 Brien McDonald Senior Economist – Industry Analysis +(61 3) 8634 3837 Steven Wu Senior Analyst - Industry Analysis +(61 3) 9208 2929

International Economics Tom Taylor Head of Economics, International +61 3 8634 1883 Tony Kelly Senior Economist – International +(61 3) 9208 5049 Gerard Burg Senior Economist – Asia +(61 3) 8634 2788 John Sharma Economist – Sovereign Risk +(61 3) 8634 4514 Global Markets Research Peter Jolly Global Head of Research +61 2 9237 1406

Australia Economics Ivan Colhoun Chief Economist, Markets +61 2 9237 1836 David de Garis Senior Economist +61 3 8641 3045 Tapas Strickland Economist +61 2 9237 1980 FX Strategy Ray Attrill Global Co-Head of FX Strategy +61 2 9237 1848 Rodrigo Catril Currency Strategist +61 2 9293 7109 Interest Rate Strategy Skye Masters Head of Interest Rate Strategy +61 2 9295 1196 Alex Stanley Senior Interest Rate Strategist +61 2 9237 8154 Credit Research Michael Bush Head of Credit Research +61 3 8641 0575 Simon Fletcher Senior Credit Analyst – FI +61 29237 1076 Andrew Jones Credit Analyst +61 38641 0978 Distribution Barbara Leong Research Production Manager +61 2 9237 8151

New Zealand Stephen Toplis Head of Research, NZ +64 4 474 6905 Craig Ebert Senior Economist +64 4 474 6799 Doug Steel Markets Economist +64 4 474 6923 Kymberly Martin Senior Market Strategist +64 4 924 7654 Jason Wong Currency Strategist +64 4 924 7652 Yvonne Liew Publications & Web Administrator +64 4 474 9771 Asia Christy Tan Head of Markets Strategy/Research, Asia, + 852 2822 5350 Julian Wee Senior Markets Strategist, Asia + 65 6632 8055 UK/Europe Nick Parsons Head of Research, UK/Europe, and Global Co-Head of FX Strategy + 44207710 2993 Gavin Friend Senior Markets Strategist +44 207 710 2155 Derek Allassani Research Production Manager +44 207 710 1532

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