After reading Alan Kohler’s brilliant column at the Drum yesterday (Business panic at Government calm) I started thinking about how exposed the Queensland economy is to a downturn in the southern States. Typically Australian States go into recession together, but the two-speed economy raises the prospect of a recession in NSW and Victoria and reasonable economic growth in Queensland, with the southern downturn detracting from Queensland growth to an extent. This divergence between States has happened before, as noted in a 2006 Australian Conference of Economists paper, Business Cycles in Australia, by my old Treasury colleagues Rob Ewing and John Hawkins:
…in some recessions there are states that are almost completely unaffected, Queensland and Western Australia are a good example of this in the mid 1970s recession.
The major way that Queensland is exposed to the economies of the southern States is through our exports of goods and services to them, which accounts for around 9% of our gross state product (GSP), or around $6 billion per quarter (see Qld State Accounts, Table 1, p. 17). We are a net importer of goods and services from other States, however, so, in relative terms, we are not as reliant on their demand as they are on our demand (see interstate trade data chart I’ve copied from the ABS website below, noting this includes goods only and not services).
Nonetheless, with interstate exports accounting for around 9% of our GSP, a recession in the southern States could easily take 1-2 percentage points off economic growth in Queensland if it results in a drop in our interstate exports of 10-20%. This order of magnitude of a drop in interstate exports is possible, and indeed Queensland interstate exports dropped 10% in 2008-09 (see the 2009-10 Annual Economic Report, p. 12). So a downturn in southern States would certainly have an impact on the Queensland economy, potentially subtracting 1-2 percentage points off our forecast growth of 5% in 2012-13 (see the mid-year Budget update), but Queensland should still having a growing economy, thanks largely to the massive amount of resources sector investment that is occurring.