States/territories with lower cases of COVID-19 have had stronger economic performance compared to the hardest hit states of NSW and Vic. This is not surprising given the imposed and self-regulated household mobility restrictions.
Lower overseas migration over the next few years is a big negative for NSW and Vic state growth. Net migration had been a big driver of NSW and Vic population growth, providing a solid base of support for GDP and also fuelling housing demand.
Lower population growth will be the biggest factor weighing on NSW and Vic state performance and these two larger states are likely to underperform compared to the rest of Australia. WA and Qld will perform better.
COVID-19 has changed some of the fundamental drivers of state economic growth. We expect to see the states that were previously lagging behind (like Qld and WA) to outperform relative to the largest states of NSW and Vic which had been performing well since the end the mining boom. We discuss the factors driving state performance in this Econosights.
Our tracker of state and territory performance (see below) shows that the ACT and NT are currently ranked as the best performing state/territory (and probably the least impacted by COVID-19), followed by WA. A year ago, the ACT was still ranked as the best performer but this was followed by Vic, Tas and NSW. Qld and WA were underperforming but these two states are now doing much better than NSW and Vic. A lower number of COVID-19 cases has clearly helped state/territory economic performance. This table reflects some recent weakness in SA from a COVID-19 cluster but this is unlikely to persist as virus cases have declined.
Population growth – big negative for NSW and Vic
One of the biggest changes impacts of COVID-19 on the states is the hit to population growth. Nationally, population growth will decline from 1.4% per annum before COVID-19 to a low of 0.3% in 2021 (see chart below) as overseas migration is expected to be negative until mid 2022. This may prove to be too pessimistic if a vaccine is widely utilised by a large share of the population sooner than expected. Population changes are a big driver of state GDP outcomes (and state GDP growth divergences too). The biggest beneficiaries of Australia’s high migration intake over the past decade have been NSW (Sydney) and Vic (Melbourne) as migrants tend to settle in these two states/cities for job prospects. This fundamental base of population support was also a big driver of housing demand for NSW and Vic and was responsible for solid gains in home prices in these two states over the past ten years. Lower population growth will weigh on NSW and Vic state growth until overseas migration turns positive.
Interstate migration flows are also important for state performance and have been disrupted by COVID-19, although this is a shorter-lived impact as state borders are now opening up.
Nationally, the impact of interstate migration is zero, but it can cause divergences in state performance. Over recent years, QLD has benefited significantly from strong inflows while NSW has had interstate outflows (perhaps housing affordability pressures pushing people North) – see the above chart
So, the hit to NSW population from overseas migration may be tempered by interstate migration being less negative. And Qld population may be negatively impacted from lower interstate migration. All up this means that over the next 1-2 years, population growth will equalise across the states, converging towards 0.3% (see above chart).
Housing – Sydney & Melbourne to underperform
There will be lower demand for housing in Sydney and Melbourne from lower migration, which will weigh on home prices in these capital cities relative to the rest of Australia. COVID-19 has hurt Sydney and Melbourne dwellings the most, with prices down by 2.9% in Sydney during the COVID period and 5.6% in Melbourne. These were also the areas most impacted by actual COVID-19 cases with the associated loss of economic activity. But other capital city prices fell by much lower pace or didn’t decline at all (like in Canberra). Regional cities also barely declined. The chart above shows this divergence across home prices.
We expect that these recent trends will continue to play out for now. Sydney and Melbourne dwellings (particularly units and areas closer to the CBDs) will continue to be negatively impacted from lower migration demand. Outer suburbs and regional cities will benefit from demand for more space as working from home becomes more normalised in the post-COVID period.
ACT and NT both reported few job losses during the COVID-19 downturn, but the lack of seasonally adjusted data makes it harder to compare relative performance. QLD, SA and WA are the most advanced in the number of jobs that have recovered since COVID-19 related losses (see chart above).
NSW’s performance has also been solid as the state has recovered 81% of job losses. Vic is lagging behind for now, as the state had the longest lockdown and the data doesn’t yet reflect the full re-opening that has taken place. Participation rates across the states are back to pre-COVID levels, except for Vic. But unemployment rates are still higher than before COVID 19 across all states and territories because employment growth needs to be stronger to absorb all the re-entrants into the labour market.
Retail spending has held up extremely strongly over 2020. Retail spending in all states and territories (except for Vic) is much stronger compared to a year ago. This has occurred from a raft of government policies including - stimulus cheques, free childcare, additional JobSeeker payments, mortgage deferrals, tax cuts and lower mortgage rates from RBA interest rate cuts. There is also some re-distribution of spending from travel and recreation to the retail sector.
Once the Vic re-opening is fully reflected in the data, Vic retail performance should also show an improvement. All states are vulnerable to some slowing in retail spending as consumers have brought forward some spending on durable goods. Although, state border openings will assist in lifting some part of retail spending, especially in cafes and restaurants expenditure.
The large non-mining states of NSW and Vic have had a long period of outperformance since 2014, after the collapse mining led to an easing in financial conditions (lower interest rates and a lower $A). At the same time, WA, NT and parts of QLD were hit by the end of mining investment. Now that the mining downturn has passed, this will benefit the non-mining states while the non-mining states of NSW and Vic will be under pressure from the impacts of COVID-19 (lower immigration and expensive housing).
While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.