Last week we learnt that Australia had gone 25 years without experiencing a recession, at least from a technical perspective. Quite an achievement in anyone’s language.
Not only that, at a time when Australia is undergoing a major economic transition — a time when many thought the economy would be weak — growth is currently running at an above-trend level of 3.3% on a year-on-year basis, the fastest pace seen in four years.
It’s all looking good, at least through the rear view mirror. However, for business, households, investors and policymakers, it’s not where the economy has been, but where it’s going, that matters most.
On that score, the latest Stateometer, released by ANZ earlier today, suggests that the acceleration seen over the past year may be about to end, thanks to a noticeable deceleration in the largest cog in the Australian economy, New South Wales.
For some background, the Stateometer is a composite index that measures economic performance across Australia’s states and territories, using 37 individual indicators that cover the business sector, households, the labour market, housing and trade.
According to ANZ, it is expressed as a deviation from a state or territories long-run growth average.
“This means that a positive reading indicates economic performance is above trend, while a negative reading indicates that performance is below trend,” it says.
It’s important to note that a negative reading does not imply that an economy is in recession.
Ok, so how are the states and territories faring right now? That answer is found in the chart below from ANZ.
It’s fairly simple to follow. Those economies sitting in the top half are growing at an above-trend growth rate, those in the bottom half below trend. Those on the left are decelerating, those in the right accelerating. The bold colours are where each state and territory currently sit, the weaker colours where it was in the prior month.
Fitting with recent GDP figures, Australia’s most populous and economically powerful states — New South Wales and Victoria — are both growing at an above trend pace. However, while Victoria is accelerating right now due to strengthening labour market conditions, New South Wales is heading in the opposite direction.
“The smoothed New South Wales index remains positive, suggesting economic activity is expanding at above trend pace. However, the index continues to fall from the thirteen-year high reached in 2015, reflecting a broad slowdown in the underlying indicators,” said Giulia Lavinia Specchia and Kieran Davies, economists at ANZ
“Given the weakness in the Stateometer’s components, we see a risk that the smoothed index falls further in August, where growth may soon be back at trend.”
Though Victoria is outperforming, and there’s signs of improvement in South Australia, Tasmania, the Northern Territory and the ACT, it’s unlikely that they’ll be able to completely offset a further slowdown in New South Wales, particularly with Queensland and Western Australia remaining weak.
While the Stateometer is not designed to forecast GDP, it does utilise a raft of near-term economic indicators to gauge underling trends across the boarder Australian economy.
At the moment it suggests that momentum in the New South Wales economy is slowing. Given its importance to the Australian economy, that’s something that warrants monitoring.