Remember NSW? It’s a leading economy once more

A decade ago it would have been a bit obvious to say NSW was driving the Australian economy but it does actually sound slightly odd to be saying that today. After all, NSW has no iron ore, no LNG, tourism slumped in the decade after the Olympics and NSW property prices have lagged the rest of the country.

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But NSW is returning to pre-2003, the last time it out-performed the Australian economy. My view, and it has been reinforced by a recent tour of the state, is the period between 2003 and 2013 was something of an aberration.

There is no doubt there was a hangover in NSW after the Olympics, following a period when the economy and the property market had grown excessively. Then the rest of Australia took off, particularly Western Australia and Queensland, with the resource investment boom. NSW also had some governance issues which I believe are now behind it.

The story today then is one of recovery. ANZ’s chief economist Warren Hogan has been emphasising how strong the NSW outlook is in recent research. The unemployment rate in Sydney has fallen below 5 per cent compared with a jobless rate of more than 6 per cent for the rest of Australia. Construction and real estate employment have risen, international student arrivals are up, the latest NSW budget showed improved operating balances and lower net debt.

The NSW economy is expected to be buoyed by substantial infrastructure spending in coming years as an expected $A20 billion in proceeds from the privatisation of electricity networks is invested in new projects.

So what has changed to pull NSW out of its long funk? On the property front, Sydney is no longer massively over-priced relative to the rest of the country. The change in government, even with their own issues, has seen a lift in confidence. This government is also starting to engage in long term infrastructure spending. Initiatives like the electricity privatisations will help NSW catch up with Victoria which has enjoyed the compound benefits of its privatisation push in the 90s.

Major developments like Barangaroo, where the office expansion will be the equivalent of London’s Canary Wharf and lift Sydney’s office supply by 10 per cent, are very important. There are planned motorway and port expansions.

The Australian economy’s migration away from the concentration of growth in the resource-based states towards more services, technology and finance, plays into NSW’s sweet spot – these are more labour intensive sectors.

This is not just a Sydney story either. The Hunter region with its coal industry is one example. While coal may not be fashionable, it demonstrates NSW is also and has always been a major resource state. The story in the Hunter is it is a coal-based recovery, not an olive oil or wine-based recovery.

That said, agriculture is a positive NSW story more generally, particularly with the end of the drought. One of our clients in Coffs Harbour is the Bennings Group, established as a banana farm in the 60s, very typical of the region.

But the founder’s two sons have now shifted out of bananas completely into blueberries, with some diversification with macadamias, significantly lifted their yields per hectare, and created a business with more potential and higher margins than bananas, in little over a decade.

They are the largest independent blueberry growers on the NSW North Coast, by far, and are looking to expand their property and increase sales into Asia.

This is the sort of story we are seeing more of in NSW, business people not content to just do things as they have always been done but looking for innovation, attractive markets, sustainable expansion. Indeed for Bennings and many companies the challenge is supporting the expansion needed to meet demand, particularly offshore.

NSW Tourism too, which suffered after the Olympics and with the financial crisis, is recovering. Sydney remains Australia’s major destination for connection with the rest of the world. For business, when there is interest in Australia from around the world, those global companies tend to look to Sydney. (That is also true to an extent for Melbourne, as the global economy recovers it will benefit too.)

There is certainly a big element of rebound in the NSW recovery, from a whole range of setbacks. But I think this recovery is soundly based. The latest budget was a solid document. It was focussed on services and recycling of infrastructure funds, there was not a massive amount of net new spending with consequent fiscal pressures. The government’s investment programs look sustainable.

Population growth is occurring for the right reasons. Sydney is a centre for IT and professional services and these are growth sectors with a robust outlook. So a lot of these natural factors to support NSW are working together now.

And for all the talk of a property bubble, when you look at Sydney real estate versus the rest of Australia, what has been happening is again more just a sense of catch up.

NSW’s traditional manufacturing base is actually quite solid but there are also, vitally, new industries emerging. I’ll just single out one company, not so much because the industry is unusual in this day and age but because it captures the theme of the rejuvenation of NSW.

Stone and Wood Group is a craft brewing business established in 2008 in Byron Bay as a start-up. It has outperformed its budgets since inception and revenues are expected to double in the next couple of years.

It’s a company that knows what it is doing and little wonder: its formation directors are ex Fosters Brewing Group employees. And Trevor O’Hoy, the former Fosters chief executive, has recently taken a non-executive director position with the group.

In great news for Stone and Wood, they’ve just won a Telstra Australian Business Award. Well done.

There’s rejuvenation everywhere in NSW, even in beer.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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