Transcription of Finance News Network with Commonwealth Bank of Australia’s (ASX:CBA) broking arm Commsec Economist, Savanth Sebastian.
Lelde Smits: Hello, I’m Lelde Smits for the Finance News Network and joining me today from Commsec is Economist, Savanth Sebastian. Savanth, welcome back to FNN.
Savanth Sebastian: Thank you, pleasure to be here.
Lelde Smits: Commsec has just released its quarterly State of the States report which looks at the economic performance of Australian states and territories. So Savanth, which states are dominating and which are lagging?
Savanth Sebastian: Well I guess if we look at the indicators across the State of the States it was pretty clear that Western Australia was the premier state. There was no slippage in rankings over the past three months. And if anything we saw that the resource states started to see some sort of level of ascendancy.
The Northern Territory actually leap-frogged the ACT into second spot and then you’ve got the other states and territories sort of bunched in the middle, and then you’ve got a gap towards South Australia and an even bigger gap towards Tasmania, which is really lagging across all the states and territories.
Lelde Smits: Which states have been the biggest movers and what’s behind their pick-up in performance?
Savanth Sebastian: I think the Northern Territory was probably the biggest improver over the past three months. It seemed to suggest that there has been a pretty healthy improvement taking place in the Northern Territory across the key economic indicators. From economic growth, through to business investment.
Lelde Smits: And which states are underperforming and at risk of further contraction?
Savanth Sebastian: The one state that pulled back was the ACT and it really struggled because business investment pulled back in the quarter quite substantially. I think, you look at Queensland and it seemed to move away from New South Wales and Victoria, which is where it was three months ago. It’s moved into third position with the ACT. And then you’ve got New South Wales and Victoria, sort of bunched together in the middle.
So, I really think it was those resource states that started to move towards the top end of the scale.
Lelde Smits: Looking closer at the individual states - the report found that New South Wales and Victoria were closely grouped together - but which state is best positioned to outperform in the future?
Savanth Sebastian: I think New South Wales is probably best positioned to outperform, largely due to the fact that its housing sector is probably six to nine months ahead of what we saw in Victoria. In Victoria over the past twelve months, it’s really been a lack of manufacturing activity, a pull back in the manufacturing sector, and probably an increase in unemployment that has bubbled out across the Victorian economy.
Here in New South Wales we’re starting to see that housing sector is really going to be a multiplier for growth across the New South Wales economy. They’ve got housing finance up around 20 per cent on a year ago – that is a very strong lead indicator for broad based economic growth.
Lelde Smits: Western Australia is still on top, as you mention, but with talk of the investment boom being over how long can this state remain strong?
Savanth Sebastian: I think if you look at the broader implications of the State of the States report, you’re seeing that certainly WA is the premier state, but there are some indicators that it is starting to pull back in terms of equipment investment, which has pulled back substantially – still at some heady levels – but is pulling back quite quickly.
Now the key here is that we’re moving away from an investment boom to a production boom. And, when move into a production boom you start to see volumes and income story starting to lift. So, it was interesting to note that Western Australia had the strongest retail sales across the nation. So, I think that income story will support and cushion the state. And, keep in mind low interest rates are starting to foster household confidence as well.
Lelde Smits: So Savanth, how does your outlook for Australia’s mining sector translate to resource stocks over the year ahead?
Savanth Sebastian: I think that certainly the resource sector was under some pressure in 2013, it’s probably going to be a better year over 2014. We’ve seen the downside risk to global growth have diminished. A lot of these mining investment firms have pulled back in terms of capital costs and really it is about income flow and trying to effectively increase production output. So, that is going result in higher profitability over 2014. And, we’ve already seen that since the start of this year, base metal prices have seen some pretty healthy gains. There is talk of tight supply in some of those markets, and that will continue to support the mining sector.
Lelde Smits: Finally Savanth, the mining sector was last year’s worst performer. How do you see it trending this year?
Savanth Sebastian: I think we will see over 2014 that investors start shifting away from high yielding stocks towards growth focussed stocks. And, I think we’ve already seen that in the last couple of weeks where the banking sector has really taken a back step, despite strong earnings expected over 2014 - and you’re seeing that shift towards the resource stocks.
It’s all about growth 2014. I think the downside risks have certainly diminished, low interest rates will start to support consumption globally and that is the real story for the resource stocks.
Lelde Smits: Savanth Sebastian, thank you so much for your outlook today.
Savanth Sebastian: Thanks very much.
Ends
