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State Economic Update 21 March 2012


NSW Followingarelativelysluggishyear,thegrowthmomentuminNSWappearstobelifting,withSFDincreasingby0.8per centintheDecemberquarter.Importantly,NSWappearstohaveaninvestmentdriverwithbusinessinvestmentliftingin the December quarter, buoyed by a solid result for engineering construction and machinery & equipment investment. NSW is likely to under perform the national average in 201112, although we are slightly more positive about the mediumtermoutlookforthisstate.Withthetightesthousingmarketinthecountryandstronggrowthinrealrents,we expectdwellinginvestmenttoturnaroundandprovideasignificantcatalystforgrowthintheNSWeconomyoverthe coming years. At the same time, NSW is benefiting from the mining boom with sizeable coal and gold deposits. This couldseeNSWbecomethestrongestnonresourcestatein201213. Victoria VictoriasclaimasAustraliasbestperformingnonresourcestatehaswellandtrulycometoanendwithSFDcontracting 0.5 per cent in the December quarter. The outlook does not look all that favourable either. With mining investment drivingthenationaleconomy,itisdifficulttofindadriverforVictoriangrowth.Privateinvestmentislikelytobeheavily weighed down by a sharp pullback in dwelling investment as the property market responds to lower prices. The structuraladjustmenttoahighAUDisbeingfeltsharplyinVictoriaandnotonlyinmanufacturing;servicestrade,oncean important driver of Victorian growth, has gone into deficit. Victorias only hope for a decent growth rate lies with interstatetradewiththeminingstates.However,interstatetradeisextremelyvolatileandthebalancingitemgrewby 22.6percentlastyearsoarepeatperformancemightbeabitofastretch.Inshort,weexpectVictoriatounderperform ingrowthtermsanditcouldverywellbetheweakestmainlandstatein201213. Queensland EconomicconditionsinQueenslandhaveclearlyliftedfollowingtheimpactofthefloodsinearly2011.Economicactivity has received a significant boost from nondwelling construction in recent months, most notably engineering construction,whichincreased20percentintheDecemberquarter.Similarly,machineryandequipmentinvestmentis nowabovethehighsofthefirstphaseoftheminingboom.Lookingahead,Queenslandislikelytoregainitsstatusasthe secondstrongeststateinthecountry,buoyedbythemassiveresourcesinvestmentpipeline.However,Queenslanditself isverymuchmultispeed.ThetourismsectorcontinuestostruggleundertheweightofahighAUDwhilethehousing marketinthesoutheastisstillamongtheweakestinthecountry.Assuch,Queenslandisnotlikelytoexperiencethe highsofWAbutshouldclearlyoutperformtherestofthecountryoverthemediumterm. WesternAustralia SignsofaninvestmentledtakeoffineconomicactivityinWAareemerging.IntheDecemberquarter,SFDwasup11per cent on a year earlier, driven by very strong growth in engineering construction and machinery and equipment investment. Looking ahead, this growth momentum is likely to be maintained, given the size and scale of the mining investmentprojectsunderwayandinthepipeline.ThisislikelytoseeWArunintosomesignificantcapacityconstraints. Partially offsetting the investment boom is an expected decline in public investment and a relatively weak housing marketinPerth. SouthAustralia Economic activity within the SA economy appears to have stalled, with quarterly SFD broadly flat in the December quarter.Withbusinessinvestmentstallingthroughthesecondhalfof2011,growthinexportsappearstohaveaidedthe economy on the back of solid agricultural output. Looking ahead, we expect business investment to drive the SA economy through 201213 as large projects such as the Olympic Dam begin construction. This is likely to be partially offsetbyasluggishconsumersector,ongoinggovernmentfiscalconsolidationandaweakhousingmarket. Tasmania TheTasmanianeconomyistheweakestinthecountryandislikelytoremainsoforsometime.Tasmanianhouseholds are still very cautious, public demand is expected to pull back further and a relatively high AUD is hitting exports and overseas tourism hard. As such, we expect that economic growth in Tasmania will significantly under perform the national average over the medium term as Tasmania remains firmly planted on the wrong side of the multispeed economy.
@2012 National Australia Bank Limited ABN 12 004 044 937

StateForecasts
GrossStateProduct Annual%change 11/12f 12/13f NSW 2.3 2.8 VIC 2.0 2.3 QLD 4.0 4.8 SA 2.0 3.0 WA 5.3 4.8 TAS 1.3 1.8 Australia 2.9 3.3 Source:NABEconomics

UnemploymentRate Averagerate 11/12f 12/13f 5.3 5.2 5.6 5.6 5.6 5.0 5.3 5.3 4.1 3.8 6.2 6.3 5.3 5.1

Themultispeedeconomypersists TheDecember2011NABQuarterlyBusinessSurveyconfirmedthatAustralianbusinessconditionsstrengthenedintothe finalmonthsof2011andweresuggestiveofaneconomygrowingclosetotrend.Muchoftheimprovementinconditions occurredinthepoorperformingindustries,includingretail,wholesale,constructionandmanufacturing,whichappeared tohavebeguntobenefitfromthetwoRBAratecutsinNovemberandDecemberlastyear.Whilethedisparitybetween sector performance that has become a feature of the Australian economy over the past two years narrowed in the quarter, it remained sizable. Various sectors affect state conditions differently and so the multispeed nature of the Australian economy is also apparent across states. The December quarter survey showed that conditions in WA continued to be supported by the relative strength in the mining sector, despite mining conditions softening in the quarter(onthebackofweakeningcommodityprices).ConditionswerealsorelativelysolidinQueenslandAustralias secondlargestminingstatewhichislikelytohavereflectedthegradualrecoveryincoalmineproductionfollowingthe floods,whichofficialdatahaveconfirmedcontinuedintolate2011.Tasmaniacontinuedtounderperformallotherstates intheDecemberquarter,althoughcareshouldbetakenwheninterpretingthisdataduetosmallsamplesize. Graph 2 Graph 1
NAB Business Conditions Index
Net bal

NAB Business Confidence Index


Net bal Net bal

Net Balance; deviation from LR national average*


Queensland Victoria WA

Net Balance; deviation from LR national average*


WA Queensland

Net bal

30 20 10 0
NSW

30 20 10 0

20 10
SA

20 10 0 -10
NSW Victoria Tasmania**

0 -10

-10
SA

-10 -20
Tasmania**

-20 -30 -40 2004 2007 2010 2005 2008 2011


* Deviation from national average since Sep 1989. Data are seasonally adjusted. ** Data have been trended using 5-term Henderson trend (due to small sample size) Source: NAB

-20 -30 -40 2004 2007

-20 -30 -40

-30 -40

2010

2005

2008

2011

* Deviation from national average since Sep 1989. Data are seasonally adjusted. ** Data have been trended using 5-term Henderson trend (due to small sample size) Source: NAB

Consistent with a general improvement in current state conditions in the December quarter, business confidence also strengthenedacrossstates.However,thedegreeofconfidencewasvariedacrossstates,withsentimentinQueensland thestrongest,whileconfidenceinTasmaniaandVictoriawasquitesubdued. Householdslimitspendinginthefaceofwaveringconfidence Realstatefinaldemand(SFD)inAustraliaroseby4.5percentovertheyeartoDecember2011.Despitethesolidoutcome overtheyear,thequarterlyprofileshowedafairlysubduedoutcomeintheDecemberquarter,followinganacceleration in activity over the first three quarters of the year. Through the year, spending growth was strongest in WA, Victoria, QueenslandandNSW,whileitwassoftestinSAandTasmania.ConsistentwiththetrendinSFD,householdspending growthhasalsorecoveredsincetheGFCbutisrelativelysoftwhencomparedtohistory.

@2012 National Australia Bank Limited ABN 12 004 044 937

3 Graph 3
Real State Final Demand
Year-ended percentage change %
WA

Graph 4
Real Household Final Consumption Expenditure
Year-ended percentage change % 15 %
Queensland

% 9
WA SA

15
Queensland

10
Victoria

10 6 5 3 0
NSW SA Victoria

5 0 -5
Tasmania

-5 -10 2007 2010 2005 2008 2011


Sources: ABS; NAB

0
NSW Tasmania

-10 2004

-3 2004 2007 2010 2005 2008 2011


Sources: ABS; NAB

-3

The average consumer has become increasingly cautious since the onset of the global financial crisis, limiting their consumptionofdiscretionaryitemsinordertohelpdeleveragetheirbalancesheet.Thisisevidencedbythesharpfallin consumption spending across the states just prior to the GFC, when household saving behaviour was significantly affectedbythedestructionofwealththatoccurredthroughlossesinfinancialmarkets.Risinginterestratesondeposits alsoprovidedaddedincentivesforhouseholdstosave.Whilethereareanumberofmeasurementissuesassociatedwith thecalculationofsavingrates,therecentupwardtrendinaggregatesavingsappearstohavebeenbroadbasedacrossall states(seeGraph).Relativetogrossdisposableincome,theriseinhouseholdsavinghasbeenparticularlypronouncedin WA.ThisreflectsdisposableincomegrowthinWAhouseholds(averaging12percentperyearsince2007)significantly outpacinggrowthinconsumptionexpenditure(averaging4percentperyearsince2007). Graph 5
Household Savings*
Proportion of gross disposable income %
WA

% 20
NSW Victoria

20

15

15

10
Queensland SA

10

5
Tasmania

0 1990 1994 1998 2002 2006 2010 1992 1996 2000 2004 2008
* Includes consumption of fixed capital Sources: ABS; NAB

PublicSectorInvestmentUnwinds

The transition from public demand to private demand continues. This is clearly evident in the pattern of capital investmentgrowthacrossthestates.WhensiftingoutthecomponentsofcapitalinvestmentwithintheSFDstatistics,we findthatpubliccapitalinvestmentacrossthestateshasgenerallyfallenastheCommonwealthfiscalstimulushasbeen woundback.ThispullbackismostapparentinQueensland,SAandTasmania.Reflectingthemultispeednatureofthe economyandthecashedupWAgovernment,publiccapitalinvestmentactuallyincreasedinWAin2011,up4.2percent in2011.Whilethepullbackinotherstateshasbeendramatic,publicinvestmentasashareofSFDstillremainshighby historicalstandards.

GrossFixedCapitalFormation2011 Yearendedpercentagechange NSW VIC QLD SA Private 1.3 0.6 28.4 5.7 Public 7.8 2.0 14.3 19.5 Total 1.0 0.1 16.3 1.3 Sources:ABS;NAB
@2012 National Australia Bank Limited ABN 12 004 044 937

WA 21.8 4.2 19.3

TAS 9.1 17.4 0.1

4 Capital investment has expanded rapidly over much of the past decade, resulting in a broadbased increase in capital expenditureasashareofstatefinaldemandacrosstheAustralianstates(seeGraph).Morerecently,capitalexpenditure hasrisenevenmorestronglyinWAandQueensland,heraldingthestartofthelongawaitedmininginvestmentboom. The mining sector in WA currently accounts for almost 26 per cent of total capital expenditure in Australia, while the Queensland mining industry is contributing around 14 per cent, its highest share in recent history (see Graph). The increased capital intensiveness of the mining sector has come at the expense of the manufacturing sector, which has beendiminishingasashareofAustralianproductionforanumberofdecadesinresponsetotheprogressivedismantling oftariffprotection.Nonetheless,theoutlookforbusinessinvestmentremainsverystronglargelyduetoinvestmentin theresourcessectorwhichshouldcontinuetosupportgrowthformanyyearstocome. Graph 6
Capital Expenditure*
Proportion of state final demand %
WA

Graph 7
Capital Expenditure by Industry by State*
Proportion of total Australian capital expenditure, annual sum % 40 % 25
WA

Mining

Manufacturing

% 25 20 15

40
Queensland

20 30
SA

30

15 20
NSW

20
NSW Victoria Tasmania

10 5 0 1990 1996 2002 2008 1991 1997 2003 2009


* Data not available for Tasmania Sources: ABS; NAB

10
Queensland SA Victoria

10

10

5 0

0 1986 1992 1998 2004 2010 1988 1994 2000 2006


* Total Gross Fixed Capital Formation Sources: ABS; NAB

SubstantialbusinessInvestmentunderwayinWA ThenonresidentialinvestmentpipelineexpandedacrossAustraliaintheSeptemberquarter2011,largelyreflectingan influxofprojectscommencinginQueenslandandWAAustraliaslargestminingstates.Consistentwiththis,workyetto bedoneasaproportionofannualworkdoneincreasedsolidly,whileitdeclinedinWAduetothelargeamountofwork completedinthisstateintheSeptemberquarter.Nonetheless,thenonresidentialinvestmentpipelineinWAremains very elevated at around two years long, with around more than half of this investment representing a significant proportion of the $43 billion Gorgon LNG project which is currently underway. Capital expenditure data confirm that miningfirmshavesubstantialinvestmentplansovercomingyears.Whenconstructed,theseprojectswilladdtoexport capacityforLNG,coal,ironoreandotherenergyandmineralscommodities.Thisprocessofreallocationislikelytobe,in part,responsibleforthenonresidentialinvestmentpipelineinNSW,VictoriaandSAremainingbelowprecrisislevels. Graph 8
Non-residential Investment Pipeline*
Work yet to be done as a proportion of annual work done
Yrs Yrs

2.0
WA

2.0 1.6
Queensland

1.6 1.2 0.8 0.4


NSW Victoria Tasmania SA

1.2 0.8 0.4 0.0 2003 2006 2009 2002 2005 2008 2011
* Calculated as the sum of non-residential building and engineering construction Sources: ABS; NAB

0.0 2000

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5 Disparityinnetinternationaltradewidening Reflectingtheincomeeffectsoftheresourcesboom,nominalnetinternationalexportsinWAhavecontinuedtoeasily outperformtherestofthecountry.In2011,thevalueofWAnetinternationalexportsrosealmost20percenton2010 levels,withthenetinternationaltradebalanceintheDecemberquartersitting$9.7billionaboveitsprevious2009peak. Elsewhere,SAappearstohavereceivedasizeableincomeboost(althoughthescaleisdwarfedbyWA),withnominalnet internationalexportsincreasingmorethan65percentin2011buoyedbythesolidperformanceofitsagriculturalexports. InQueensland,netinternationalexportshavecontinuedtorecoverfromtheimpactsoftheearly2011floods,although are not yet back to their preflood levels. However, net international trade in Queensland is likely to remain under pressureoverthenearterm.AhighAUDhashittourismreasonablyhardandthishasshownupintermsofQueesnlands servicestrade,whichfellalmost7percentin201011.Withservicestradecontinuingtoremainweak(seeGraph10),this islikelytodetractfromfurthergrowthinQueenslandsmerchandiseexports. InVictoriaandNSW,thetradebalanceformerchandiseexportsinnominaltermshasgenerallydeterioratedsincelate 20101. Services trade, which makes up around a third of total exports in Victoria and NSW, is also likely to have deterioratedinthesestates.Balanceofpaymentsdatasuggeststhat,in2011Australianservicesexportscontractedby almost7percentandservicesexportsintheDecemberquarterwereattheirlowestlevelsince2005withmuchofthe decline coming from travel services. With a strong AUD and ongoing weakness in international student enrolments, VictoriaandNSWareunlikelytoreceiveanyliftingrowthfromnettradeoverthemediumterm. Graph 10 Graph 9
Nominal Net Exports
$ 20000 15000 WA 10000 Queensland 5000 0 Victoria -5000 -10000 NSW -15000 -15000 1985 1989 1994 1998 2002 2006 2011 1988 1993 1997 2001 2005 2010 Source: ABS, NAB Group Economics SA 5000 0 10000 25,000 Other Services 20,000 15,000 10,000 5,000 Rural 4,000 3,000 Transport 2,000 1,000 $ 20000 15000 $m 40,000 Travel 35,000 30,000 Commodities 5,000 7,000 6,000

Goods & Services Exports


$m 8,000

Tasmania
-5000 -10000

Other

0 0 1985 1989 1994 1998 2002 2006 2011 1988 1993 1997 2001 2005 2010

Source: ABS, NAB Group Economics

Labourmarketconditionssoften Australiahas enjoyed a trend decline in the rate of unemploymentsince the early1990s, whichhas been fairly broad based across the states. Prior to the financial crisis and during phase one of the mining investment boom unemploymentratesinbothWAandQueenslanddippedbelow4percent(seeGraph).Consistentwiththeseverylow rates of unemployment, the NAB Quarterly Business Survey shows that, during this time, the availability of suitable labourwasanincreasinglysignificantconstraintonfirmsproduction,particularlyinWAandQueensland(seeGraph).In late2008,Australiasunemploymentraterosesharplyandlabourbecamemorefreelyavailable,asshownbyasignificant decline in the difficulty of finding suitable labour. The labour market subsequently began to tighten from a low base, especially in WA. More recently however, the number of firms reporting labour availability as an issue has generally levelledoff,whichisconsistentwiththecurrentsoftnessinemploymentgrowth.Giventhesoftoutlookforthelabour market the unemployment rate is expected to remain close to 5 per cent over the remainder of this year labour availabilitymayremainlessofaconcernforbusinessesinthenearterm.

Itshouldbenotedthatthesestatisticsrepresentmerchandisegoodsonly,andNSWandVictoriaarenaturalimporters becauseoftheirrelativelylargeports.
@2012 National Australia Bank Limited ABN 12 004 044 937

6 Graph 11
Unemployment Rate
Trend %
Queensland
TAS

Graph 12
Labour Shortages
Availability of suitable labour a significant constraint to production % 8 % 50
Queensland
SA

% 50
WA

8
NSW

40 6 30 4 20 2 10
NSW

40 30 20
SA

6
Victoria

4
WA

Victoria

10 0 2001 2004 2007 2010 1999 2002 2005 2008 2011


Source: NAB Business Survey

0 2000 2003 2006 2009 2012 2002 2005 2008 2011


Sources: ABS; NAB

0 1998

While there is a notable disparity in employment growth across states, the variation in unemployment rates of the individualstateshasbeenlessmarked.Thishasinpartreflectedtheexpansionofjobvacancyratesinstatesthathave experienced more rapid employment growth, particularly in WA and Queensland, which has helped to reduce the tightnessinlabourmarketconditionsinthosestates.TheunemploymentrateinWAisrelativelylowataround4percent, whileitishighestinTasmania(6percent)andQueensland(5percent).Whiletherehasbeenaslightpickupinnet interstate migration (and net overseas migration) in WA in response to relativelystrong labour market conditions, the flowofnetmigrationacrosstheotherstatesappearstohavebeenbroadlyunaffectedbythetightnessinlabourmarket conditions since mid 2010 (see Graph). During the past decade there has been a general decline in net interstate migrationtoQueensland,whilethenetoutflowofpersonsfromNSWhasfallenandVictoriaisnowbenefitingfroma (marginally)positiveinflow.Netoverseasmigrationhasdeclinedacrossallstatessincethebeginningof2009,withthe relativelyhighAustraliandollarandchangedmigrationpolicieslikelytohavediscouragedsomeoverseasarrivals.

Flow of persons

Graph 13
Annual Net Interstate Migration
Queensland
Flow of persons

40000

40000

20000

20000

Victoria
0

WA
0

SA
-20000 -20000

-40000

-40000

NSW
-60000 1982 -60000 1988 1994 2000 2006 1987 1993 1999 2005 2011

Sources: ABS; NAB

Wagepressurescontained,fornow JustpriortotheGFC,wagesgrowthwasunsustainablyhighacrossallstatesparticularlyinWAastheeconomywas expanding faster than the ability of the labour market to adjust, underpinning a rapid acceleration in inflation (see Graphs).ImmediatelyfollowingtheGFC,wagesgrowtheasedsignificantlyasaresultofthesharpdeteriorationinlabour marketconditions.WhilewagepressuresreemergedreasonablyswiftlyduringthepostGFCrecoveryphase,theybegan toretreatinmid2011,inlinewithsofteninglabourmarketconditions.Wagepressuresremainaconcernforthemining states (Western Australia and Queensland), where a significant amount of investment is expected to come online at a veryrapidpacebuttheriskofhigherwagesgrowthoutsideofminingappearstohavelessened. Consumer price inflation has trended within a close range across all states, despite notable variations in spending and consumptiongrowth.InflationarypressuresappearfairlywellcontainedacrossAustraliaatpresent,largelyreflectingthe broadbasedmoderationinpricesasaresultoftheappreciationoftheAustraliandollar,aswellastheabilityoflabourto movefreelyacrossstates.Giventherelativesoftnessinthelabourmarketatpresent,whichiskeepingwagepressures low,priceinflationisexpectedremainrelativelysoftovermostof2012.However,thereissomeriskthatwageandprice growth will pick up over coming years, as business investment strengthens, the exchange rate depreciates and labour marketconditionsimprove.
@2012 National Australia Bank Limited ABN 12 004 044 937

7 Graph 14
Wage Price Index
Year-ended percentage change %
Perth

Graph 15
Consumer Price Index
Year-ended percentage change % %
Brisbane Perth

% 5 4 3 2
Sydney Adelaide Tasmania

5 5 4 4 3 2

5
Brisbane Sydney

3
Melbourne

Tasmania Adelaide

3 1

1
Melbourne

2 1998 2001 2004 2007 2010 1999 2002 2005 2008 2011
Sources: ABS; NAB

0 2005 2007 2009 2011 2005 2007 2009 2011


Sources: ABS; NAB

Stategovernmentfiscalpositionsdeteriorating ThefiscalpositionsofStateGovernmentshavegenerallydeterioratedsinceourlastStateEconomicUpdate.According tothe201112midyearfinancialupdatesoftheStateTreasuries,allstatesexceptforVictoriaandWAareexpectingto reportanoperatingdeficitin201112.DespiteeconomicconditionsdeterioratingbetweentheirBudgetsandmidyear updates, NSW and Queensland revised up their estimated 201112 net operating balances for 201112. Driving the improvementinNSWspositionwasthepullingforwardofaround$703millioninroadfundingfrom201213.Similarly, some expenses have been pushed back until 201213, meaning that the underlying budget position hasnt actually improved.The201213netoperatingpositionwasreviseddown$613million.InQueensland,thenetoperatingbalance for 201112 was revised up $1.2 billion due largely to a further advance payment for the Natural Disaster Relief and Recovery Arrangements from the Australian government. As such, this helps explain much of the large downward revisioninQueenslandsoperatingbalancein201213.Incontrast,WA,SAandTasmaniareviseddowntheirestimated netoperatingbalanceswhileVictoriasoperatingbalanceremainedbroadlyunchangedfromBudgetestimates. In 201213, all states except Victoria and WA are forecasting operating deficits while the fiscal positions of all states except Victoria were revised down from Budget estimates. However, Victorias fiscal outlook does look somewhat optimistic. Its housing market is among the weakest in the country and transactions have dropped sharply. The fall in stampdutyandlandtaxrevenuecouldalonepushVictoriaintoanoperatingdeficitin201112and201213.Underpinning the general weakness in state fiscal positions has been the impact of slowerthanexpected growth in the overall GST poolreflectingthesluggishconsumersectorandsignsthatgreatersharesofconsumptionexpenditurehavegonetoGST exemptgoodsandservices.Similarly,theeconomicindicatorsthatdrivestaterevenuestreams(suchaspropertyprices andsales,wagesandhoursworkedandcommodityprices)havegenerallyweakenedoverthepastsixmonthsorso.This islikelytoprovidefurtherdownsiderisktothefiscalpositionsofstategovernmentsandwecouldverywellseefurther downwardrevisionswhenstategovernmentsbeginreleasingtheir201213Budgets. Graph 16 Net Operating Balance
$m 1000 $m 1000

-1000 2011-12 2012-13 2013-14 2014-15

-1000

-2000

-2000

-3000

-3000

-4000

-4000

-5000 NSW
Source: State Treasuries

-5000 Vic Qld WA SA Tas


@2012 National Australia Bank Limited ABN 12 004 044 937

8 Statehousingmarketsweakening Weakereconomicgrowth,financialmarketuncertainty,asluggishconsumersectorandweakerlabourmarketconditions sawadownturninAustraliashousingmarketthrough2011.IntheyeartoDecember2011,housepricesacrossallcapital citiesfell,withaveragecapitalcityestablishedhousepricesfalling4.8percent.Initialweaknessinthehousingmarket camefromBrisbaneandPerth,howevermorerecentlyMelbourneandAdelaidehavefollowed,declining6.1and6.4per centrespectively.Incontrast,Sydneyshousingmarket,whichhadmuchmoremodestgainsleadinguptothecurrent downturn,hasproventobequiteresilientwithhousepricesdeclining2.7percentintheyeartoDecember. Importantlyforthehousingmarket,mortgagearrearshavenottickedupinanymajorway.Whiletheyhaveincreased, they still remain below 1 per cent of total onbalance sheet loans. The upshot of this is that there is no evidence of widespread forced sales. Vendors appear to be holding on to properties for longer which is largely reflected in falling auctionclearanceratesaswellasanincreaseindaysonmarket.Similarly,overalltransactionshavepulledbackoverthe pastyearwiththesharpestfallsevidentinSydney,MelbourneandBrisbane(seeGraph).Inotherwords,thecurrentpull back in the housing market is largely a cyclical phenomenon. Economic and labour market conditions have not deterioratedtothepointwhereforcedsalesaredrivingmarketconditionsandassuchvendorshavebeenholdingonto propertiesratherthansellingatheavilydiscountedprices. Graph 17 Graph 18 Established House Transfers House Price Index
Year-ended percentage change % 50 Brisbane 40 30 20 10 0 Sydney -10 2000 2003 2006 2009 2000 2003 2006 2009
Source: ABS, NAB

% 50 Hobart Melbourne Adelaide 20 10 0 -10 WA 40

20,000 Melbourne

12,000

Perth 15,000

8,000
Sydney

30
Adelaide

10,000

4,000
Brisbane

Hobart

5,000 2002

0
2005 2008 2011 2004 2007 2010 Source: ABS, NAB

Akeyfactorthathashelpedtoexplaintheweakeninghousingmarketsince2010hasbeentheweakpopulationgrowth evidentsincethen.Populationgrowthhasslowedtolessthan1.5percentayearfromtheheadydaysofgrowthinexcess of2percentin2008.Atthesametime,thepaceofdwellingcompletionshaspickedupacrosssomepartsofthecountry. This is most evident in Victoria, where a sharp increase in dwelling construction since 2009 saw increased volumes of propertycomeonlinejustaspopulationgrowthwaspullingback.InQueensland,recentdwellingconstructionactivity hasbeenrelativelyweak,althoughthemarketdoesneedtoabsorbtheoverbuildevidentinthesoutheastpriortothe economicdownturn.Incontrast,investmentgrowthinNSWhasremainedrelativelyweakwhencomparedtopopulation, helpingtoshieldthemarketfromthecurrentdownturn. Onamorepositivenote,itappearsthatgrowthinrealrentspointstosometentativesignsofrecoveryinthehousing market. Annual growth in real rents generally improved in the December quarter, although growth was broadly flat. Brisbane recorded growth in real rents for the first time in a year while growth in Sydneys rents remains strongest, reflecting a lack of construction activity evident since 2003. In Hobart, growth in real rents has eased while we expect Melbournesrentalmarkettofollowgiventhelargeincreaseindwellingcompletionssince2009.

@2012 National Australia Bank Limited ABN 12 004 044 937

Graph 19 Trend Dwelling Completions to Population


% %

9 Graph 20 Annual Growth in Real Rents


% %

0.35 0.30 Qld 0.25 0.20 0.15 0.10 0.05 0.00 2000 NSW Vic SA WA

0.35 0.30 0.25 0.20 0.15 0.10 Tas 0.05 0.00


2003 2006 2009 2000 2003 2006 2009

8 6 Brisbane 4 Adelaide 2 0 Melbourne -2 Sydney -4 -6 2000 Perth

8 6 4 2 0 Hobart -2 -4 -6
2003 2006 2009 2000 2003 2006 2009 Source: ABS, NAB

Source: ABS, NAB

Despitethesetentativesigns,however,expectationsofweakerpricesovertheneartermremain.AccordingtotheNAB Residential Property Survey, respondents were generally expecting further weakness in the housing market over the comingtwelvemonths.In2012,respondentsexpectedhousepricestofallby0.4percent.Reflectinganoversupplyinthe Victorianmarket,surveyrespondentsappearedmostbearishonVictoria,withexpectationsthatVictorianhouseprices willfall1.3percentintheyeartoDecember.Similarly,weakconditionsintheQueenslandandSAmarketssawsurvey respondentsexpectingfallsof1.2and1percent,respectively.NSWisexpectedtobethestrongestmarket,reflectingthe underlyingshortageandsolidrentalgrowth,withexpectationsofpricegrowthof0.8percentwhileexpectationsaround WAremainbroadlyflat. Graph 21 House Price Expectations
4 % 3 2 1 0 -1 -2 -3 -4 -5 Mar-11 Mar-12 Mar-13 Jun-11 Jun-12 Sep-11 Dec-11 Sep-12 Dec-12 Jun-13 Sep-13 Dec-13 Expectations

Australia
Source: NAB

Victoria

NSW

Qld

SA/NT

Compositionofproduction Whencomparingeconomicconditionsacrossstates,itisimportanttobeawareofthevaryingcontributionofindustry sectorstoeacheconomy(seeTable).Themostnotabledisparityisfortheminingsector,whichcontributesalmostone thirdofallproductioninWAand8percentinQueenslandbutmakesonlyamarginalcontributioninVictoria,Tasmania, NSW and SA. Similarly, the NSW and Victorian economies are more heavily dependant on finance & insurance and property&businessservicesthantheotherstates,whileQueenslandandWAarethemostdependantonconstruction.

Compositionofproduction
Agriculture Mining Manufacturing Construction WholesaleTrade RetailTrade Finance&Insurance Property&Business Other Source:ABS NSW 2 3 9 6 5 4 15 13 43 VIC 3 3 10 7 5 5 12 14 41 2010/11ShareofStateProduction(%) QLD SA WA 3 6 1 8 4 29 8 11 6 10 7 12 5 4 3 6 5 4 7 9 5 10 9 10 42 43 29 TAS 8 1 10 8 3 7 8 7 49 Australia 3 8 9 8 4 5 10 12 41

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10 Shareofeconomicactivity WAhassteadilyincreaseditsshareofAustralianeconomicactivitysincethemiddleofthe2000s,fromjustunder13per centtomorethan14percent.MuchofthisgainappearstohavecomeattheexpenseofNSW,whoseshareofeconomic activity has fallen from more than 33 per cent to less than 32 per cent. In nominal terms, these changes are more profound,withWAmakingupmorethan15percentofthenationaleconomy.Giventhecapitalintensityofthemining boomandthatWAspopulationgrowthhasnotmatchedtheincreaseinincomes,WAGDIpercapitahasballoonedin recentyears,withthedisparityinpercapitaincomeswideningsignificantly.In201011,WArealGDIpercapitawasmore than$93,000,athirdhigherthanthenationalaverageandalmostdoublethatofTasmania. Graph 23 Graph 22 Real Gross Domestic Income per Capita Share of Real GDP
% %
$ 90,000 $ 90,000

NSW
30 15

WA
80,000 70,000 80,000 70,000

WA Vic
20 10

Qld
60,000 60,000

Qld
10 5

SA NSW
50,000 40,000

SA Tas

Vic Tas

50,000 40,000 30,000

0 1989/90

0 1995/96 2001/02 2007/08 1991/92 1997/98 2003/04 2009/10

30,000 1991/92

1997/98

2003/04

2009/10

1995/96

2001/02

2007/08

Source: ABS, NAB

Source: ABS, NAB

MichaelCreed EconomistAgribusiness (613)86343470 Michael.Creed@nab.com.au

AlexandraKnight EconomistAustralia (613)92088035 Alexandra.Knight@nab.com.au

RobBrooker HeadofAustralianEconomics&Commodities (613)86341663 Robert.J.Brooker@nab.com.au

AlanOster GroupChiefEconomist (613)86342927 Alan.Oster@nab.com.au

@2012 National Australia Bank Limited ABN 12 004 044 937

11

Macroeconomic, Industry & Markets Research


Australia Alan Oster Jacqui Brand Rob Brooker Alexandra Knight Michael Creed Dean Pearson Gerard Burg Robert De Iure Brien McDonald Tom Taylor John Sharma Tony Kelly James Glenn Group Chief Economist Personal Assistant Head of Australian Economics & Commodities Economist Australia Economist Agribusiness Head of Industry Analysis Economist Industry Analysis Economist Property Economist Industry Analysis & Risk Metrics Head of International Economics Economist Sovereign Risk Economist International Economist Asia +(61 3) 8634 2927 +(61 3) 8634 2181 +(61 3) 8634 1663 +(61 3) 9208 8035 +(61 3) 8634 3470 +(61 3) 8634 2331 +(61 3) 8634 2788 +(61 3) 8634 4611 +(61 3) 8634 3837 +(61 3) 8634 1883 +(61 3) 8634 4514 +(61 3) 9208 5049 +(61 3) 9208 8129

Global Markets Research - Wholesale Banking Peter Jolly Head of Markets Research Robert Henderson Chief Economist Markets - Australia Spiros Papadopoulos Senior Economist Markets David de Garis Senior Economist Markets New Zealand Tony Alexander Stephen Toplis Craig Ebert Doug Steel London Nick Parsons Tom Vosa Gavin Friend

+(61 2) 9237 1406 +(61 2) 9237 1836 +(61 3) 8641 0978 +(61 3) 8641 3045

Chief Economist BNZ Head of Research, NZ Senior Economist, NZ Markets Economist, NZ

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Head of Research, UK/Europe & Global Head of FX Strategy Head of Market Economics UK/Europe Markets Strategist UK/Europe Foreign Exchange +800 9295 1100 +800 842 3301 +800 64 642 222 +800 747 4615 +1 800 125 602 +(65) 338 0019

+(44 20) 7710 2993 +(44 20) 7710 1573 +(44 20) 7710 2155 Fixed Interest/Derivatives +(61 2) 9295 1166 +(61 3) 9277 3321 +800 64 644 464 +(44 20) 7796 4761 +1877 377 5480 +(65) 338 1789

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