STATE HANDBOOK: NEW SOUTH WALES OCTOBER 2017

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CONTACTS

James Glenn Riki Polygenis Alex Stanley Senior Economist Head of Australian Economics Senior Interest Rate Strategist +61 (0) 455 052 519 + 61 475 986 285 +61 2 9237 8154 james.glenn@nab.com.au +61 3 8697 9534 alex.stanley@nab.com.au riki.polygenis@nab.com.au

CONTENTS 2 | Key points 3 | In Focus: Observations on the construction cycle 4 | Consumer & household sector 5 | NAB Customer Spending Behaviours 6 | Business sector 8 | Labour market 9 | Demographics 10 | Residential property 12 | Fiscal outlook & semi market 14 | Economic structure and trade 15 | State Forecasts

CHART 1: STATE GSP GROWTH FORECASTS Annual growth, % change

CHART 2: STATE FINAL DEMAND GROWTH Year-ended % change

Source: ABS and NAB Group Economics 2

KEY POINTS: NSW has lost some momentum, but the outlook remains positive

• In recent years, NSW has generally led the way in terms of the anticipated transition back towards non-mining economic growth. More recently, however, there has been a marked slowing in annual growth of state final demand, easing from rates of around 5% in H1 2016, to 2.4% over the year to Q2 2017 – more consistent with the national average growth rate. The slowdown has been relatively broad based, but was surprisingly most pronounced in private business investment. The partial economic indicators suggest conditions are mixed across the various segments of the market. Overall, however, we remain relatively upbeat about the outlook, particularly with respect to the outlook for infrastructure spending. After recording growth of around 2¼% in 2016-17, growth in Gross State Product (GSP) is expected to pick up to 3.1% in 2017-18 (just behind Victoria), before easing back to 2½% in 2018-19 (Chart 1).

• Business investment should rebound somewhat going forward, bolstered by a combination of solid business conditions, strength in commercial property (especially offices) and high levels of public infrastructure investment (much of which includes a private partnership component). That should help to offset the shrinking contribution (and eventual headwinds) that is likely to come from dwelling investment as the construction cycle approaches its peak. Consumption growth will be fairly muted as the cooling housing market weighs on household wealth, while very elevated levels of household debt and the rising cost of essentials (such as energy prices) hamper discretionary spending. Support from declines in the household savings rate will likely be more limited going forward as well, but we do anticipate an improvement (albeit gradual) in wages growth – reflecting a strengthening labour market (see below). The trade sector (including services exports) may be supportive, particularly as global economic conditions improve, but exports could struggle to grow as strongly as in recent years given our expectation for modest AUD depreciation ahead.

• ABS data show that employment growth has picked up again this year, having slowed to a crawl in late 2016/early 2017. However, the volatile trend have been in contrast to other partial indicators which generally pointed to consistent (and quite solid) job growth over recent years. In either case, the unemployment rate has steadily improved to around 5% and is currently the lowest of all the states. Population growth is expected to remain solid in NSW, meaning that strong rates of job creation need to continue to drive further improvements in the unemployment rate. Recovering business investment, solid business conditions (especially in construction and services) and high levels of construction activity (including a rise in public infrastructure) should support the labour market. Overall, the unemployment rate is forecast to improve a little further to 4¾%.

• As anticipated, the housing market appears to have come off the boil and is likely to continue to cool going forward. That, along with other constraints such as tighter credit conditions probably means that the peak in housing construction may be just around the corner as well – growth in dwelling investment has already slowed considerably (although the pipeline of projects remains very large). See page 15 for our housing price forecasts.

-4

0

4

8

12

Sep-89 Sep-93 Sep-97 Sep-01 Sep-05 Sep-09 Sep-13 Sep-17

NSW Australia

State Final Demand Growth

-

0

1

2

3

4

5

6

NSW VIC QLD SA WA TAS NT ACT

2014-15 2015-16 2016-17 (f) 2017-18 (f) 2018-19 (f)

010203040506070

0

5

10

15

20

25

1985 1998 2011 1991 2004 2017Commenced Under construction Approvals

Houses Units

IN FOCUS: Some observations on the construction cycle in NSW

ABS data suggests there is over $10b in public infrastructure projects underway in NSW, while residential projects are at $29b. However, the state Budget has committed to nearly $73b in infrastructure projects over 4 years. That should help drive further jobs growth – the WestConnex and light rail projects alone are expected to generate around 20k jobs.

That said, the pace of growth in public investment looks set to slow from next year (Chart 6), while the outlook beyond 2018-19 is uncertain as budgeted spending falls. There are, however, a number of projects still under consideration (not captured below). For example, the State Budget claims reserved Rebuild and Restart projects will contribute ¼ ppts to economic growth over a couple of years.

Source: ABS, NAB Group Economics

Booming construction activity has been a major driver of growth and employment in NSW. Residential property has played a major role, but following signs that market conditions are cooling, we are starting to see indications that the peak in housing construction may soon come. Approvals have started to fall and new commencements have dipped a little – although both are still elevated. We suspect that tightening credit condition and some waning in demand could see these trends continue, although record levels of projects under construction can potentially keep activity at a high level for some time (Chart 3) – elongating the cycle.

Meanwhile, public investment is providing an alternative source of growth. Public infrastructure projects underway in NSW are at record highs (Chart 5).

CHART 3: NSW DWELLING CONSTRUCTION ACTIVITY 000s

CHART 4: NSW JOBS CYCLE BY INDUSTRY Accumulative jobs created since Q2 2014 (000s)

CHART 6: STATE CAPITAL EXPENDITURE Billion dollars

3

CHART 5: PUBLIC INFRASTRUCTURE UNDERWAY* Billion dollars

-100

-50

0

50

100

150

Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17

Construction Professional services Manufacturing

Personal services Retail Wholesale

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2002 2006 2010 2014

NSW Vic Qld SA WA Tas

*The value of work yet to be done on commenced public projects (transport, water, energy, telecoms)

0

20

40

60

80

100

0

4

8

12

16

20

2009-10 2011-12 2013-14 2015-16 2017-18 2019-20 2021-22General Govt Public corp. (ex WestConnex)PPPs WestConnex

State Funded PPP Projects (c)

Other state funded infrastructure programs

Share of Investment(4 years to 17-18)

-30

-20

-10

0

10

20

30Eating out

Entertainment

Charitabledonations

Major HH items

Personal goods

Use of credit

TravelHome

improvementsSavings, super,

investments

Children

Groceries

Transport

Paying off debt

Medical expenses

Utilities

Q2'16 Q2'17

CONSUMER SPENDING: Consumers still remain cautious when it comes to discretionary spending

to spend on discretionary items – indicating that they were most likely to dedicate spending towards utilities costs, medical expenses and reducing debt, but least likely to spend on things like eating out (Chart 9).

Despite that, however, recent retail sales data presents a more optimistic trend, with spending on furnishings and cafes/restaurants showing quite solid growth over the past year.

It is unclear how long this trend may continue given expectations for the housing market to cool, while wages growth improves only gradually.

Source: ABS, NAB Group Economics

Growth in real household consumption has been relatively subdued in recent quarters, while year-ended growth eased to 2.5% in Q2 2017 (from a peak of over 4% in 2014). Downbeat consumer confidence is consistent with the trend, likely reflecting a combination of muted wages growth, elevated household debt levels and diminishing support from asset prices. There is also evidence that higher living costs (namely utility prices) are having an impact on spending decisions – although CPI inflation has so far remained relatively muted.

Consumer sentiment has been quite downbeat for some time now and according to NAB’s Consumer Anxiety Survey, this has continued to make households reluctant

CHART 7: NOMINAL AGGREGATE COMPENSATION OF EMPLOYEES AND HOUSEHOLD CONSUMPTION GROWTH Year-on-year percentage growth

CHART 9: NAB CONSUMER ANXIETY SURVEY - CONSUMER SPENDING PREFERENCES Changes in Consumer Spending Preferences (net balance)

CHART 8: RETAIL TURNOVER AND HOUSE PRICE GROWTH Year-on-year percentage growth

-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%

1995 1998 2001 2004 2007 2010 2013 2016

Compensation of employees Household consumption (nominal)

-8%

-4%

0%

4%

8%

12%

16%

20%

-8%

-2%

4%

10%

16%

22%

28%

2005 2007 2009 2011 2013 2015 2017

Sydney House Price Growth (Y-o-Y %)

Retail Turnover Growth (Y-o-Y%)

4

NAB CUSTOMER SPENDING BEHAVIOURS: Most regions in NSW are seeing growth in customer spending

Source: ABS, NAB Group Economics 5

NAB’s customer transaction data allows for a more granular look at spending behaviours across regions in NSW. By individual postcode, spending growth was fastest in Quakers Hill 2763 (29.4%), Georges Hall 2198 (27.3%), Brooklyn 2083 (26.2%) and Church Point 2105 (22.1%). For regional areas, spending was fastest in Willow Tree 2339 (58.8%), Moree Plains 2387 (58.7%), Gwabegar 2356 (55.4%), Newcastle West 2302 (47.1%) and Harden 2597 (46.1%).

Customer spending on Arts & Recreation was fastest in both Sydney Metro (33.9%) and NSW Regional areas (36%).

CHART 10: GREATER SYDNEY METRO AREA Year-ended growth to Q2 2017

CHART 12: REGIONAL NSW (EX METRO) Year-ended growth to Q2 2017

CHART 11: TOP 20 FASTEST GROWING SUBURBS FOR SPENDING Metro, y/y % change in the value of spending, Q2 2017

CHART 13: TOP 20 FASTEST GROWING SUBURBS FOR SPENDING Regional, y/y % change in the value of spending, Q2 2017

Overall Growth

4.1% Overall Growth

5.1%

Average Monthly

Spend (Q2) $2,099

29.4

%

27.3

%

26.2

%

22.1

%

16.6

%

16.4

%

15.8

%

15.5

%

14.4

%

14.3

%

13.2

%

12.8

%

12.3

%

11.9

%

11.7

%

11.6

%

11.5

%

11.4

%

11.3

%

11.3

%

0%

5%

10%

15%

20%

25%

30%

Qua

kers

Hill

Geo

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Hal

l

Bro

okly

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Chu

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Poin

t

Cro

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Lane

Cov

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orth

Gu

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Bulla

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Ryd

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Kog

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Colla

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Go

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Bron

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Kir

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Blak

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rst

Croy

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Par

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2763 2198 2083 2105 2132 2066 2161 2784 2116 2217 2097 2072 2786 2031 2172 2024 2572 2061 2221 2133

58.8

%

58.7

%

55.4

%

47.1

%

46.1

%

42.8

%

36.7

%

35.1

%

34.7

%

32.9

%

32.7

%

31.8

%

30.7

%

30.1

%

29.6

%

29.5

%

27.8

%

27.8

%

27.2

%

25.2

%

0%

10%

20%

30%

40%

50%

60%

70%

Will

ow

Tre

e

Mo

ree

Plai

ns

Gw

abeg

ar

New

cast

le W

est

Har

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Yeo

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Nor

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Du

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Curr

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Cole

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Del

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Bogg

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2339 2387 2356 2302 2587 2868 2408 2844 2342 2707 2403 2406 2588 2344 2736 2876 2369 2832 2424 2382

Average Monthly

Spend (Q2) $1,955

-100

102030405060

Conditions Confidence

BUSINESS CONDITIONS: Conditions remain very favourable and suggest a lift in investment ahead

expenditure in the 12 months have held up at reasonably elevated levels and point to an acceleration in business investment (Chart 15) – the latest available data on state investment in expectations in the ABS Private Capital Expenditure Survey points to a pick-up in investment this financial year as well (page 7).

Consistent with large pipelines of residential and infrastructure projects, the construction industry is currently recording one of the highest levels of business conditions in NSW (and elevated confidence). Unsurprisingly, given competitive challenges and issues facing households, distribution service such as retail are underperforming, but all industries are still reporting positive conditions.

NSW has remained one of the top performing states in terms of business conditions according to the NAB Business Survey, although the gap between the best and worst performers seems to be narrowing (Chart 16). While conditions have not been trending higher for some time now, they have stabilised at quite an elevated level. This has had clear implications for spare capacity, with capacity utilisation rates also stabilising at levels not far below their pre-GFC peaks in NSW (Chart 14).

These observations suggest good conditions for additional business investment in NSW, having been disappointingly soft in recent quarters (Chart 15). But while actual capital expenditure has slowed sharply, leading indicators from the NAB Survey point to a pick-up over coming quarters. Expectations for capital

CHART 14: NAB BUSINESS SURVEY – CAPACITY UTILISATION Per cent of full capacity

CHART 16: SPREAD IN NAB BUSINESS CONDITIONS Net balance

CHART 15: NAB SURVEY CAPEX EXPECTATIONS & PRIVATE BUSINESS INVESTMENT GROWTH Net balance; Per cent growth

CHART 17: NSW BUSINESS CONDITIONS & CONFIDENCE BY INDUSTRY Net balance, Q2 2017

74

76

78

80

82

84

86

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

NSW Total

-30

-20

-10

0

10

20

30

40

-30

-20

-10

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Spread Total NSW

-50

-30

-10

10

30

50

-40

-20

0

20

40

60

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

NSW Capex Expectations (12-month, adv 6-month, lhs)

NSW Business Investment Growth (rhs)

Source: NAB Group Economics 6

INVESTMENT: Has been disappointing, but partials could suggest a turnaround

Sentiment in the market has also been elevated according to the NAB Commercial Property Survey (chart 21).

NAB survey measures of capex intentions (page 6) have been quite upbeat on the investment outlook. Despite being slower to show an upturn, official measures started to follow suit with the latest available ABS data pointing to an uptick in 2017/18 for NSW (chart 20). This is a welcome sign and consistent with better reads from other partial indicators on the business sector.

Construction activity will see additional support from the very large pipeline of public infrastructure projects (more than $70b spent by 2020) going forward, most of which includes a private partnership component.

Private business investment growth in NSW has been disappointing of late. Even after accounting for asset transfers, investment has increased only modestly over the year to Q2 2017 (up 0.5%) – well down on the rates of growth seen during 2016. That said, partial indicators have shown some signs of improvement. New approvals for private non-residential building (smoothed) have increased sharply of late – although the series tends to be lumpy.

Approvals for ‘other’ non-residential buildings are highest, but office approvals have been steadily improving over time, while warehouse approvals have driven most of the improvement over the past year. Office vacancy rates are holding at low levels, which may trigger additional office approvals going forward (Chart 19).

CHART 18: NON-RESIDENTIAL BUILDING APPROVALS Million dollars

CHART 20: NSW CAPITAL EXPENDITURE & EXPECTATIONS Actual & expected based on previous realisation ratio ($billion)

CHART 19: NSW OFFICE MARKET CONDITIONS Million dollars; Per cent of capacity

CHART 21: NAB COMMERCIAL PROPERTY INDEX - NSW Index

0

100

200

300

400

500

600

700

2000 2002 2004 2006 2008 2010 2012 2014 2016Retail/wholesale Offices Factories Warehouses Other

567891011120

50100150200250300350

2005 2007 2009 2011 2013 2015 2017Office approvals Office vacancies (rhs)

0

5

10

15

20

Building & Structures Machinery & Equipment

Actual & expected based on previous realisation ratio

2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 (e)

0

20

40

60

80

100

Office retail industrial Total

Jun-16 Mar-17 Jun-17

Source: ABS, JLL, NAB Group Economics 7

LABOUR MARKET: Labour market performing well, despite unexplained volatility in jobs growth

Labour market partials have generally held up quite well. The employment conditions index from the NAB Business Survey has been exceptionally strong, while diminished spare capacity as reported by firms in the Survey also points to solid labour demand in the near-term (Chart 23). Additionally, official job vacancies are strengthening. However, despite the apparent strength in labour demand, wages growth has remained relatively muted – the wage price index rose just 2% y/y for Q2 2017.

Over the past year, most of the jobs created were in either construction, or in parts of business and personal services. High levels of residential construction and infrastructure spending likely explain the rise in construction jobs, although the pace of growth will likely slow going forward as the residential cycle peaks. Job losses have been largest in retail, consistent with poor reads on business conditions for the industry (Chart 24).

Annual employment growth has picked up again this year after slowing to a crawl in late 2016/early 2017 – although we suspect fluctuations in employment growth in recent years partly reflects statistical anomalies as it does not align with other partial indicators that show more stable growth.

Job gains have more than made up for solid population growth in NSW, helping the unemployment rate steadily trend lower (to below 5%) since early 2015 – the participation rate, however, has fluctuated along with employment growth. The regional unemployment rate is higher, but has improved considerably (Chart 22).

CHART 22: UNEMPLOYMENT RATE BY REGION Per cent, nsa

CHART 24: CHANGE IN EMPLOYMENT BY INDUSTRY, NSW Last 12 months, thousands

CHART 23: UNEMPLOYMENT RATE & NAB CAPACITY UTILISATION RATE Per cent; dollar billions

23456789

10

Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17

NSW Greater Sydney Rest of NSW

2468101214161868

7072747678808284

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

Capacity Utilisation (inverse, lhs)

Unemployment rate (rhs)

Underutilisation rate (rhs)

-40 -30 -20 -10 0 10 20 30 40

Construction

Business services

Public admin

Education

Admin services

Mining

Communications

Manufacturing

Hospitality

Transport

Other services

Wholesale trade

Finance

Rental services

Arts

Health

Utilities

Agriculture

Retail trade

Source: ABS, NAB Group Economics 8

DEMOGRAPHICS: Population growth still strong, but affordability may hinder interstate flows

ABS data on employment changes by country of birth suggests most of the gains in full time employment have been attributed to the domestic workforce – although in terms of job numbers, that has been more than offset by a loss of part-time work. Employment of workers born in overseas regions have risen solidly over the past year, with similar contributions coming from both full time and part time employment. Job gains were particularly apparent for workers coming south-east and north-east Asia, as well as North Africa and the Middle East (Chart 27).

Sources: ABS; NAB Economics

NSW population growth remains at relatively elevated levels, supported largely by net overseas migration -- although interstate outflows are also less than they have been in previous years (Chart 25) – reflecting the economy’s relative outperformance (which includes having the lowest unemployment rate of the states), and likely helping to offset the impact of worsening affordability.

After lagging behind for more than a decade, NSW population growth is now consistent with national average levels (Chart 26).

CHART 25: NSW POPULATION GROWTH Thousands, over the year CHART 27: NSW EMPLOYMENT BY COUNTRY OF BIRTH

Thousands, over the year

CHART 26: NSW POPULATION GROWTH Year-ended growth, %

-50

0

50

100

150

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Natural increase Net overseas migration

Net interstate migration Total population growth

0.0

0.5

1.0

1.5

2.0

2.5

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

NSW AUS

-100 -80 -60 -40 -20 0 20 40 60

Australia

New Zealand

NORTH-WEST EUROPE

SOUTHERN & EASTERN EUROPE

NORTH AFRICA & THE MIDDLE EAST

SOUTH-EAST ASIA

NORTH-EAST ASIA

SOUTHERN & CENTRAL ASIA

AMERICAS

SUB-SAHARAN AFRICA

OTHER

Change in number employed over 12 months (000's)

Full-time

Part-time

9

DWELLING INVESTMENT: We still expect the dwelling construction boom to peak in the near future

in the construction cycle will be significantly delayed (Chart 28). We continue to anticipate that softening market conditions and tightening credit conditions will prompt developers to stall projects. The NAB Residential Property survey indicates that tighter credit has become an issue in all states (not just NSW, Chart 30).

The potential oversupply of apartments remains a concern (Chart 31), although apartment approvals have come back to somewhat more sustainable levels, while indicators of the market balance, such as vacancy rates, remain favourable.

Rental yields have steadily declined, which along with tighter credit conditions and lower capital growth expectations will eventually weigh on investor demand. Meanwhile, tougher affordability is a constraint on owner-occupier demand (Chart 29).

Source: ABS; CoreLogic; NAB Economics

Growth in dwelling investment has slowed a little in NSW, but activity is holding up at very elevated levels (up 5.8% over the year). Activity has been somewhat volatile in recent quarters, although that may reflect temporary disruptions relating to a both very wet and hot weather in H2 2016/early 2017. Nonetheless, annual growth has averaged a little under 6% in H1 2017, which is well down on average growth of 15% in the past two years, and might suggest some loss of underlying momentum.

Building commencements for NSW are only available to Q1, but have come off from their recent peak. That is consistent with the trend we have seen in the more timely building approvals data, although approvals have actually held up a little better than we were previously expecting – although not enough to suggest to us that the peak

CHART 28: NSW COMMENCEMENT RATES FALLING Number

CHART 30: NAB SURVEY – CONSTRAINTS ON DEVELOPMENTS Next 12 months

CHART 29: YIELDS & PRICE-TO-INCOME Per cent, year to Q3 2016

CHART 31: NSW RESIDENTIAL BUILD ACTIVITY TO POPULATION Ratio

0

50

100

150

200

250

300

1985 1991 1997 2003 2009 2015 1987 1993 1999 2005 2011 2017

NSW House pipeline to pop NSW Unit pipeline to popAust House pipeline to pop Aust Unit pipeline to pop

10

0

5000

10000

15000

20000

25000

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Approvals Commencements

2

3

4

5

6

7

8

2

3

4

5

6

7

8

1996 2002 2008 2014 1998 2004 2010 2016Sydney house rental yield Aust house rental yield Aust unit rental yieldSydney unit rental yield Sydney price to income Aust price to income

Rental Yield Price-to-incomeYield Ratio

Rising Interest Rates

Tight Credit

Lack of Development Sites

Sustainability of House…

Housing Affordability

Construction Costs

Labour Availability

WA SA/NT QLD NSW VIC

Not atall Sig.

Not verySig.

SomewhatSig.

Sig. Very

RESIDENTIAL PROPERTY: We expect to see further cooling in the housing market

detached houses and apartments in metro areas has become less apparent – although is clearly still the case in a number of areas (Charts 33 and 35). For now we remain confident that housing fundamentals in Sydney remain strong enough to avoid a sharp market correction, but will not prevent a more muted market going forward – especially for apartments where the supply response is largest. Rising supply, worsening affordability, less foreign demand and prudential constraints will limit future price gains – despite elevated levels of pent up demand.

The NAB Residential Property Survey suggests softer residential prices growth in the medium-term (Chart 34), while NAB’s forecast is for house prices in Sydney to rise 5.1% over 2017 and 3.7% in 2018, while apartments will see more modest gains of 0.5% in 2018 after rising 5.9% in 2017.

Source: ABS; CoreLogic; NAB Economics

Residential property price trends in Sydney have been somewhat mixed over the past year, but generally point to a cooling housing market (with prices actually falling in the month of September). Property prices gained a second wind in 2016 following further interest rate cuts from the RBA, but worsening affordability, tighter monetary/credit conditions and (moderate) concerns around supply appear to have reversed the trend once again – although both house and apartment prices are continuing to see quite elevated rates of annual growth – while regional price growth has also eased (Chart 32). The slowing trend is also evident in other market indicators such as auction clearance rates and turnover.

All metropolitan and regional areas are seeing positive growth (to varying degrees), and unlike our previous observations, the disparity in performance between

CHART 32: NSW RESIDENTIAL PROPERTY PRICE GROWTH Per cent

CHART 34: NAB PROPERTY SURVEY – PRICE EXPECTATIONS Per cent

CHART 33: SYDNEY - MEDIAN PROPERTY PRICE GROWTH Per cent, year to Q2 2017

CHART 35: REGIONAL PRICES Per cent, year to Q2 2017

-4.0

-2.0

0.0

2.0

4.0

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Q4

'16

Q1

'17

Q2

'17

Q3

'17

Ne

xt 1

2mN

ext

2y

NSW Australia

Expectations

Estimated price growth in relevant survey period...

0 5 10 15 20

BlacktownCanterbury-Bankstown

Central CoastCentral Northern SydneyCentral Western Sydney

Eastern SuburbsFairfield-Liverpool

Inner SydneyInner Western Sydney

Lower Northern SydneyNorthern Beaches

Outer South Western SydneyOuter Western SydneySt George-Sutherland

House Prices

Unit Prices

11

-10%

0%

10%

20%

30%

40%

-10

0

10

20

30

40

2000 2002 2004 2006 2008 2010 2012 2014 2016

Rest of state Sydney houses Sydney Units

0 2 4 6 8 10 12 14 16 18

Central West

Far West

Hunter

Illawarra

Mid-North Coast

Murray

Murrumbidgee

North Western

Northern

Richmond-Tweed

South Eastern

0

5

10

15

20

25

2017-18 2018-19 2019-20 2020-21

Transport Other Electricity Water Health Education Housing

0

0.5

1

1.5

2

2016-17 2017-18 2018-19 2019-20 2020-21

Transfer duty revenue Net operating balance

FISCAL OUTLOOK: Revenue outlook has improved. Infrastructure pipeline at $73b over four years

duty for foreign buyers) and one-off revenues associated with transactions, have contributed to upward revisions to revenue.

Expenditure is estimated to be $3.3 billion higher across the three years to 2019-20 than forecast at the mid-year update. The higher expenses reflect fairly comparable impacts from both new policy decisions and parameter variations.

At the time of the 2017-18 Budget, the Government (consolidated) was committed to spending $72.7b on infrastructure over four years – an annual average spend equivalent to 3.4% of GSP in 2015-16. The latest budget included over $7½ billion in new capital works (since the mid-year update) in the four years to 2020-21, including $5b in additional funding for schools, hospitals and health facilities. However, most of the infrastructure pipeline remains focused on transport (totalling $41.4b over four years). Large amounts of infrastructure spending will help create jobs and are aimed at boosting long-term productivity in the economy. According to the 2016-17 Budget, the WestConnex and light rail projects alone will create around 20k jobs in NSW.

Source:: NSW State Budget; NAB Economics

According to the most recent state Budget, the underlying financial position of the NSW Government has broadly improved since the mid-year fiscal update. Improvements in the 2017-18 Budget were primarily driven by upward revisions to transfer duties and SOC dividends. These more than offset lower GST receipts and payroll tax. The operating surplus for 2016-17 was revised up by half a billion dollars (to 0.8% of GSP), while the three following years are up nearly $3 billion in total (relative to the mid-year review) (Chart 36).

Improvements to the budget position mainly came from the revenue side. In addition to transfer duties and dividends, new policy measures (e.g. higher transfer

CHART 36: NSW NET OPERATING BALANCE & TRANSFER DUTY Per cent of GSP

CHART 38: COMPOSITION OF TAX REVENUE Share on (per cent)

CHART 37: NSW STATE CAPITAL SPENDING BY FUNCTION Billion dollars, as at 17-18 Budget

12

Transfer duty31%

Pay roll tax27%

Land tax12%

Other tax revenue

9%

Tax on vehicles

8%

Gambling7%

Other stamp duty

6%

SEMI GOVERNMENT AND CREDIT OUTLOOK: NSW Infrastructure spending driving higher net debt forecasts

Issuance is forecast to rise in 2017-18, to around $6.4bn, after two years of minimal net issuance. FY YTD, NSWTC has issued around $900m, focused on long end taps.

NSW is rated Aaa/stable from Moody’s and AAA with a negative outlook from S&P. The state’s budget performance has been solid, but the risk of a downgrade rests with S&P’s assessment of the Commonwealth.

13

NSW’s accounts for the greatest share of aggregate state net debt growth over the coming years, fuelled by significant ongoing infrastructure investment. No forecast is made for debt reduction from the potential part sale of Sydney Motor way Corporation.

CHART 39: NSW NON-FINANCIAL PUBLIC SECTOR NET DEBT

CHART 40: NSWTC BORROWING PROGRAM

CHART 41: NSWTC TERM BONDS OUTSTANDING

NSWTC Issuance outlook ($bn) 2017-18 2018-19 2019-20 2020-21New Money 1.9 5.0 6.4 3.0Maturities 4.5 5.1 5.6 7.0Total 6.4 10.1 12.0 10.0Source: NSWTC, Budgets, NAB

0

10

20

30

40

50

60

70

2016-17 2017-18 2018-19 2019-20 2020-21

$bn

Source: NSW State Budgets, NAB

FY17 MYBR

FY16 MYBRFY16

FY17 FY18

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Feb-18 Mar-19 May-20 Apr-21 Mar-22 Apr-23 Aug-24 May-26 May-27 Mar-28 Feb-30

AUDbnNSWTCorp bond curve-state guaranteed

issuance FYTD

Source: NSWTC, NAB

ECONOMIC STRUCTURE AND TRADE: AUD support appears to be waning

Source: ABS, CBRE, NAB Economics

The NSW trade deficit has shrunk from its peak in late 2015, although most of the improvement was driven by changes in the deflator, with the real trade balance deteriorating since then – despite a modest improvement in Q2 2017. Higher frequency merchandise trade data shows the trade deficit somewhat stabilising more recently (chart 43).

Service sectors such as tourism have been performing well in recent years off the back of a lower AUD. However, there are some early signs that support may be starting to be wane, especially given AUD resilience more recently. Short-term visitor

CHART 43: NSW NET TRADE Billion dollars, 3mma

CHART 45: HOTEL OCCUPANCY RATES Per cent

CHART 44: TOP EXPORT DESTINATIONS, NSW Billion dollars, 12-month average

CHART 46: COMPOSITION OF EMPLOYMENT & GVA Per cent

0% 2% 4% 6% 8% 10% 12% 14% 16%

Agriculture

Mining

Manufacturing

Utilities

Construction

Wholesale trade

Retail trade

Hospitality

Transport

Communications

Finance

Rental services

Business services

Admin services

Public admin

Education

Health

Arts

Other services

Employment GVA

14

-7

-6

-5

-4

-3

-2

-1

0

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

Value of exports ($m)

1 Japan 10908

2 China 7214

3 ASEAN 4586

4 Korea 3497

5 Taiwan 2759

6 US 2599

7 New Zealand 2367

8 EU 2107

9 India 1916

10 HK 1059

11 UK 576

12 Singapore 43013 Germany 158

Value of imports ($m)

1 China 29087

2 EU 22383

3 ASEAN 14483

4 US 12240

5 Japan 7059

6 Germany 5992

7 Korea 4877

8 UK 2945

9 Singapore 2895

10 New Zealand 2694

11 Taiwan 1897

12 HK 428

70

75

80

85

90

Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17

SYDNEY OR MELBOURNE OR BRISBANE OR

arrivals continue to grow at a solid pace, but momentum has eased a little in recent months, while hotel occupancy rates have been tracking broadly sideways (albeit at an elevated level).

FORECASTS BY STATE AND TERRITORY NSW to perform strongly in 2017-18 before losing some momentum in 2018-19

Source: ABS, CoreLogicNAB Economics

NAB’s economic forecasts by state and territory are below. For a summary of the outlook by state, please see the States Handbook – Overview which contains links to the detailed handbook for each state and territory.

REAL GROSS STATE PRODUCT AND UNEMPLOYMENT RATE FORECASTS Annual average

15

HEDONIC HOUSE PRICE FORECASTS* Through the year growth to Q4

HEDONIC UNIT/APARTMENT PRICE FORECASTS * Through the year growth to Q4

2015 2016 2017f 2018f 2019f

Sydney 15.5 10.7 5.1 3.7 3.0

Melbourne 15.8 9.5 8.6 5.5 3.4

Brisbane 6.9 2.7 3.1 1.9 1.2

Adelaide 3.8 3.8 3.4 1.7 1.7

Perth -4.2 -2.9 -3.0 0.7 1.2

Hobart 7.0 9.6 10.0 4.9 1.7

Cap City Avg 11.2 7.3 4.6 3.4 2.5

2015 2016 2017f 2018f 2019f

Sydney 13.1 5.8 5.9 0.5 0.6

Melbourne 7.5 4.7 6.4 1.2 -2.4

Brisbane 1.1 -3.0 -1.1 -1.8 -1.2

Adelaide 2.4 0.6 0.5 0.5 0.5

Perth -2.8 -6.3 -1.9 0.4 0.7

Hobart 1.1 6.4 5.7 2.4 0.6

Cap City Avg 8.2 3.5 4.7 0.5 -0.3

15-16 16-17f 17-18f 18-19f 15-16 16-17 17-18f 18-19fNSW 3.5 2.2 3.1 2.5 5.4 5.0 4.7 4.7VIC 3.3 2.9 3.3 2.7 6.0 5.9 5.8 5.4QLD 2.0 2.2 3.2 2.5 6.2 6.2 6.0 5.9SA 1.9 1.8 2.7 1.7 7.3 6.7 6.5 6.5WA 1.9 0.3 3.2 3.0 6.0 6.2 6.2 5.9TAS 1.3 1.0 2.2 1.8 6.5 6.1 6.0 6.0NT 2.7 1.5 1.5 5.0 4.2 3.5 4.0 4.2ACT 3.4 3.0 3.1 2.6 4.5 3.8 4.8 4.8Australia 2.7 2.0 3.2 2.5 5.9 5.7 5.4 5.3

Gross State Product YoY Unemployment RateNAB growth and unemployment rate forecasts for the states