From a holistic perspective, Australia’s economy is doing pretty well at present. Economic growth, at 3.1% year-on-year, is running above trend, unemployment is edging lower and employment is increasing at a decent clip, largely due to improved operating conditions across the nation’s vast services sector.
However, beneath the surface, the underlying economy is fragile with growth uneven across the country. As was the case in the immediate aftermath of the global financial crisis, a two-speed economy has emerged, although on this occasion it’s the non-mining states and territories that are outperforming, helping to mask weakness in other parts of the country.
To Alexandra Veroude and Tony Morriss, members of Bank of America-Merrill Lynch’s (BAML) Australian economics team, the two-speed economy likely contributed to last weekend’s election result, seeing great swathes of the Australian electorate desert the nation’s two largest political parties — the Liberal-National Coalition and Labor — in favour of smaller parties.
“The patchy dispersion of economic performance may be a likely contributor to the turn against the major parties in this election,” wrote Veroude and Morriss in a research note released on Monday.
“Voters may have turned towards the minor parties as they likely feel that the headline economic story of above trend growth does not reflect their personal economic situation.”
The charts below, supplied by BAML, underscore the economic divergence between mining and non-mining states of late.
The first looks at economic growth in each of Australia’s states, evaluating the performance on both a quarterly and year-on-year basis. The second looks at annual employment change in each of Australia’s mainland states, going back to the turn of the century.
“The rotation of growth towards the services sectors has seen New South Wales, Victoria and Tasmania (supported by tourism) outperform the mining states (Queensland and Western Australia) over the past year,” write Veroude and Morriss.
“Over 90% of the jobs created in the past year (May 2015 to May 2016, latest data) were in NSW or VIC, with jobs shed in South Australia, Tasmania and the Northern Territory. Looking at full time employment the difference is even starker; over 210% of the full time positions created in the past year were in NSW and VIC.”
Although there was a swing away from the ruling Liberal-National Coalition across the country, it is by no means insignificant that the movement towards minority parties was prominent in states affected by the mining downturn.
Think the Nick Xenophon Team in South Australia. Pauline Hanson’s One Nation in Queensland.
Looking ahead, Veroude and Morriss believe that “there is a real possibility that another election might have to be called in coming months should the Governor General feel that neither party is able to form a stable government”.
They also believe that Australia’s AAA credit rating could come also under threat.
“We would not rule out at least one rating agency putting Australia on negative outlook, at some stage, if only as a signal that discipline will be required to maintain a credible trajectory back to surplus over the medium-term,” they note.