The New South Wales economy represents about one third of Australia’s gross domestic product. Given its size, NSW has a diversified economic base in the construction, finance, telecommunications, high value manufacturing, business services and transport sectors.
NSW 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 NSW Government over the past decade. This strategy has enabled the total State Sector Net Debt to decline considerably over the past decade from 11.5% of Gross State Product (GSP) in 1995 to 4.8% at June 2006. State Sector Net Debt increased to an estimated 5.7% of GSP at June 2007, and will rise further over the next decade reflecting the NSW Government’s substantial program of capital infrastructure projects. The major projects announced by the NSW Government are in water, rail and road transport, and electricity infrastructure.
The NSW economy faced headwinds similar to those facing the national economy in 2006/07, with exports and dwelling investment both weaker than expected. The severe drought detracted heavily from farm output and exports, while tighter monetary policy limited the recovery in dwelling investment. In contrast to more resource oriented States, NSW received little direct boost from higher commodity prices and resource sector investment, while its non-resource exporters and import competing manufacturers bore the brunt of the commodity driven rise in the exchange rate. As a result, the NSW economy has expanded at a more moderate rate than the national average in recent years. State final demand is estimated to have increased by 2.5% in 2006/07, modestly stronger than the 2.1% growth rate recorded in the previous year.
After four years of record investment growth, NSW business investment eased back in 2006/07, broadly in line with forecasts. Notwithstanding the pull back in investment, it remained at historically high levels and continued to add strongly to the capital stock during 2006/07. Although a much smaller share of the economy than private business investment, public investment (reflecting the NSW Government’s infrastructure program) provided a solid boost to NSW economic growth.
Consumer spending was stronger than expected in 2006/07 despite high oil prices at the start of the year and further interest rate rises. Spending was supported by firm wage growth, gains in employment, strong share market, a decline in inflation and lower taxes.
Dwelling construction continued to decline in 2006/07, although there were some signs of the downturn levelling out from the December quarter 2006. Leading indicators of dwelling investment (house prices, housing finance and dwelling approvals) remained subdued in early 2007, although strong auction clearance rates and a tight rental market improved preconditions for a recovery in 2007/08.
NSW GSP growth is estimated to have risen by 1.5% in 2006/07, somewhat less than the forecast 2.5% growth in State final demand because of the drag from international trade. Imports grew strongly, boosted by higher consumer demand NSW manufactured and service exports remained weighed down by a rising exchange rate, while rural exports were severely affected by the drought.
Developments in the national and NSW labour markets have supported a low inflation economy. Increases in female and older age male participation are improving labour supply. This has helped aggregate wage growth to remain stable despite continued above trend employment growth and record low unemployment rates. NSW employment grew by 1.75% in 2006/07, and the unemployment rate was 4.7% at June 2007. While wage pressures have risen in sectors where skills shortages have emerged, these pressures have not been transmitted to other sectors.
Outlook for 2007/08
Based on NSW Treasury forecasts, the State economy is expected to strengthen in 2007/08, with continued solid support from public investment and consumer demand, moderate recoveries in dwelling and business investment, an improvement in exports and an assumed recovery in the rural sector.
Although the NSW economy will strengthen further during 2007/08, growth will remain less than in the resource-oriented States while the current commodity boom continues. NSW Treasury expects NSW economic output growth to strengthen from 1.5% in 2006/07 to 2.5% in 2007/08. State final demand growth will improve from 2.5% to 3.5%.
In line with improving GSP, NSW employment is likely to grow at an above-trend rate again in 2007/08. The unemployment rate is likely to remain at generational lows of around 5%.
Private consumption growth should remain solid in 2007/08. Consumers will respond positively to continuing steady growth in employment and wage rates, improved purchasing power from the strong exchange rate, lower tax rates and gains in share market related income and wealth. However, household spending will remain constrained by mildly restrictive interest rate settings, high oil prices, high rental costs and little improvement in home equity.
Dwelling investment should improve in 2007/08. Demand is likely to be led by owner-occupiers. Low vacancy rates, rising rental prices and cyclically low house prices will persuade more households to shift from rental accommodation to home ownership. These factors should also encourage a return of investors to the housing market.
Business investment is expected to grow in 2007/08 after easing in 2006/07, following four years of record investment. With strong demand, high profits, low capital costs and strong share markets, conditions for investment remain favourable. Factors specific to NSW include the assumed rural recovery, continued strong global demand for thermal coal, and demand generated by the resources boom for NSW industrial outputs and financial and business services.
After detracting heavily from output growth in 2006/07, net exports performance should improve in 2007/08. Exports growth will be assisted by the farm sector’s recovery from the drought and by continued strong North Asian demand for thermal coal. Net exports performance also will benefit from slower growth in plant and equipment investment, which has a large imported component.
Public sector investment is forecast to rise strongly, supported by a large increase in total State infrastructure spending. While total State infrastructure spending has already increased by around 35% in the four years to 2006/07 compared with the previous four year period, it is projected to rise further in the coming four years. In 2007/08, total State infrastructure spending is estimated to be $12.5 billion, an increase of 28.8% on spending of $9.7 billion in 2006/07. This consists of $4.9 billion expenditure by the General Government sector (15.5% higher than 2006/07) and $7.6 billion by the Public Trading Enterprise (PTE) sector (an increase of 39.3% on 2006/07). Infrastructure spending will continue at around $12.3 billion a year over the forward years, bringing total State spending on infrastructure over the four years to 2010/11 to an estimated $49.6 billion - 55.8% higher than estimated total spending in the four years ending June 2007.
The net debt of the State sector is forecast to increase substantially, by $20 billion over the next four years, principally to fund the large PTE capital spending program. This will be more than offset by an increase in infrastructure and other fixed assets totalling $35 billion over the same period. From a low of 4.8% of GSP ($15.3 billion) at June 2006, total State net debt is projected to increase to 9.3% of GSP at June 2011.
Prospects for the NSW economy in the first few years beyond 2007/08 will depend on the strength of the global economy, the business cycle, domestic policy settings and productivity trends.
