ANZ Stateometer: resilience

Economic momentum across Australia’s states and territories largely slowed in the June quarter, the ANZ Stateometer found, but could still be described as resilient given increasingly difficult conditions, including strong inflation.

Three trends are visible across the economy – interest rates are heading toward neutral territory, businesses and households are standing relatively firm so far, but housing prices are feeling the pinch.

According to the ANZ Stateometer, economic momentum decreased across all Australian states and territories in the three months to June 30, except Western Australia and the Northern Territory which were boosted by commodity prices and increased trade.

Although momentum (the change in economic activity) was sluggish, the level of economic activity was still above trend across the board, despite rising inflation and the start of the rate-tightening cycle. The housing component of the ANZ Stateometer cooled, but the consumer component rose, reflecting resilience in consumption demand.

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Biting

Inflation and cost of living pressures are biting into household confidence, but spending hasn’t fallen off a cliff yet. Business indicators show stretched capacities and persistent price pressures.

The labour market is a bright spot, with unemployment on its way to sub-3 per cent levels by early 2023, and wages expected to accelerate in the second half of calendar 2022.

The Reserve Bank of Australia’s nominal neutral rate assessment is likely in the 2 per cent to 3 per cent range, but ANZ Research expects it to lift its policy rate above neutral to rein in both inflation and inflation expectations.

ANZ Research has forecast the target cash rate will reach 3.35 per cent by the end of 2022, meaning 150 basis points of rate hikes between September and December.

In the housing sector, a surge in variable mortgage rates is crimping borrowing capacity, which in turn is driving a slowdown in most capital city housing prices despite very low rental vacancy rates.

ANZ Research expects a drop in housing prices of around 18 per cent from their April peak, through 2022 and 2023.

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Drag

The ANZ Stateometer showed a decline in NSW’s economic performance in the second quarter, with housing and trade the main drag on the headline figure. Victoria also decelerated, with the index falling below the national average.

In Queensland, the economy softened slightly in the three months to June, with all components except the consumer component registering losses.

South Australia’s performance declined from above the national average in the March quarter to below average in the June quarter. Tasmania’s economic performance slowed across all components, while the ACT softened slightly.

Bansi Madhavani, & Adelaide Timbrell are Senior Economists, Madeline Dunk is an Economist and Arindam Chakraborty is a Junior Economist at ANZ

This story is an edited excerpt from the ANZ Stateometer Report, published August 25, 2022