“These figures reinforce the strength of our state’s economy and its importance to the country as a whole,” he said. “We are doing everything in our power to ensure a strong, sustainable economy for future generations.”
Sydney’s recent economic strength will be a valuable electoral asset for the Berejiklian government going into next month’s state election. But the economic outlook for the city, and the state, is shifting.
A big factor is Sydney’s sagging property market. A long housing boom peaked last year and the city’s median house price has since fallen by around 12 per cent, an unusually big decline for the city.
Some analysts say there’s still much further to fall. Dr Shane Oliver, an expert on asset booms and busts and AMP’s chief economist, has forecast a 25 per cent drop from peak to trough. “So we’re around half way there,” he says.
As prices fall, and fewer properties change hands, home builders and property developers may respond by scaling back their construction plans. That, in turn, threatens to reduce activity and employment in the construction industry, a key driver in Sydney’s economic strong performance.
The good times are already over in city’s real estate services sector – it shrank last financial year. Falling house prices can also sap consumer confidence affecting other crucial sectors, especially retail.
A lot will depend on how Sydney’s debt-laden households react to the housing downturn.
Terry Rawnsley, one of Australia’s leading regional economists, has identified another potential threat for Sydney’s economy: the fallout from the banking royal commission.
In a presentation to the Committee for Sydney business group last week, he warned that uncertainty in the financial sector following the commission’s final report, along with lower lending growth, will result in reduced bonuses and weaker employment growth in the banking and insurance industries.
That will inevitably have flow-on effects for the rest of the economy, especially in Sydney where finance and insurance is the city’s biggest industry sector.
Finance and insurance accounted for 15.1 per cent of Sydney’s economic output last financial year compared with 9.5 per cent nationally; meaning any disruption in that sector will have a disproportionate effect on the city.
The final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released this month, recommended sweeping changes to the sector.
One reason for Rawnsley’s conclusions is his research into what happened in Sydney following the 2008-09 global financial crisis. While bank profits were not greatly affected, Rawnsley found the wages and bonuses paid to Sydney’s finance sector workers dropped by around $1 billion in the year following the crisis.
“Even if the fallout from the royal commission only has half that amount that it will have an impact on the Sydney economy,” says Rawnsley, who is the national leader of economic and social analysis for consultancy firm SGS Economics and Planning.
He predicts the city’s eastern suburbs, north shore and north-west will be most affected because of the high share finance sector professionals living in those districts.
One finance worker bracing for weaker conditions in Sydney’s finance industry is Arman Soetanto, a mortgage broker at Lending Clinic in the CBD. He has seen a “dramatic” decline in customers in recent months and attributes this to a change in the way banks are treating home loan applications.
“You also have fewer people wanting to refinance because in the back of their minds they don’t think they will be approved,” he says. “People essentially think there is a lot more paperwork they need to provide and in the end they might not get approved so they have this lazy mentality,” he says.
Soetanto, who lives in Chatswood, is especially worried about the potential loss of up-front commissions, something mooted in the royal commission recommendations. “If the up-front is lost it will be quite devastating for us mortgage brokers and there will be a lot of competing on price.”
The broker says small home loan lenders, such as himself, would have to venture into other areas to remain profitable. “I think some of us will look at doing other things; with me I have a background in asset finance, so car loans and equipment finance.”
‘The sugar hit … is largely behind us’
Two potent trends at work earlier this decade underpinned Sydney’s golden run – falling interest rates and the lower Australian dollar which followed the historic mining boom.
Oliver says those factors helped unshackle the city’s economy. “That set off the housing boom which in turn helped support consumer spending and jobs growth,” he says.
Rising property prices also stoked a long housing construction boom.
And one legacy is a very strong the jobs market. The latest figures show unemployment in NSW has fallen to 4.3 per cent, the best in around four decades. Across much of Sydney the rate is even lower.
But Oliver warns the NSW economy is now changing gears. “The sugar hit from interest-rate cuts and the Australian dollar falling is largely behind us now,” he said. “The crane count over Sydney is peaking.”
He says the NSW economy stands to benefit from improved business investment, solid demand for services exports, including international education, and the pipeline of government infrastructure spending. “But it’s unlikely those new growth drivers will be as quite strong as in the past,” he says. “Therefore growth in NSW will probably start to slow down.”
Developments offshore could also take a toll. International financial institutions have recently revised down their expectations for global growth – a potential negative for the state’s important export sector.
In fact, Sydney’s economy has already lost some momentum. Analysis by Terry Rawnsley shows Sydney’s economic growth rate was 3.1 per cent in 2017-18, the slowest in three years.
Like Oliver, Rawnsley says the many big infrastructure projects planned or underway in Sydney will help offset the economic headwinds. That includes various metro lines, road projects, light rail and early works for the Western Sydney Airport.
“Sydney still has many strengths, such as a highly productivity economy, which are dominated by knowledge intensive industries, and a skilled and nimble workforce,” he says.
Even so, the next state government is set to face more difficult economic circumstances than during the past two parliamentary terms.
The political state of play
The economic battlelines have been drawn in the prelude to next month’s state election.
The robust growth during this term of parliament bolsters a key Coalition pitch to voters – its credentials as an effective economic manager.
One plank of that message is the Berejiklian government’s formidable infrastructure program, which totals close to $90 billion over four years. The scale of that investment has been made possible by the policy of asset recycling, where the proceeds of privatisation are earmarked to fund the construction of new infrastructure.
Perrottet repeatedly claims that a switch to Labor would put the state’s economic growth, and its infrastructure renewal, in jeopardy. “Right now NSW needs to stay the course and remain a bastion of strength in an uncertain global economy – that is what the Liberals and Nationals will deliver,” he said earlier this week. “Labor’s threats to cancel projects, cancel tax cuts, and abandon responsible financial management pose a very real threat to our economic prospects and to the jobs of thousands of people across our state.”
But Labor is not devoid of political ammunition on economic issues. It has sought undermine the government’s economic management credentials by drawing attention to cost blow-outs on some major projects, including the eastern suburbs light rail.
One part of the government’s asset recycling policy – the controversial stadiums renewal plan, including the demolition and reconstruction of Allianz Stadium – has come at great political cost.
And Labor has targeted the government over privatisation, which is unpopular with many voters. Earlier this week shadow Treasurer Ryan Park called on the government to rule out further privatisation of government service delivery. “The privatisations and sell-offs have gone too far,” he said. “Everyone in NSW knows where the Berejiklian government stands on privatisation. They should be upfront with the people of NSW and say what will be privatised next under a re-elected Berejiklian Government.”
Another Labor campaign theme is cost-of-living pressures. Michael Daley identified this as a priority when he became Opposition Leader in November. Opinion polls show that, despite strong economic growth, NSW families rate the costing of living as one of their biggest worries.
The state’s recent economic strength has shown up on the Berejiklian government’s bottom line. It has delivered unusually strong budget results over the past four years, the standout being a $5.7 billion surplus in 2016-17. That’s equivalent to 1 per cent of the state’s annual economic output, the biggest share in at least two decades. Last financial year the surplus was a robust $4.2 billion.
But the expectation of weaker economic conditions in future is reflected in the most recent budget forecasts. The NSW half-yearly budget review, released in December, downgraded this year’s budget surplus by more than $300 million to $1.1 billion – about half of what Perrottet predicted it would be when he delivered his first budget 18 months earlier.
Last year the government was forced to slash a total of $8 billion in expected stamp duty revenue over the four years to 2021-22 due to the downturn in Sydney’s property market.
The government’s half-yearly budget review also warned that economic threats to NSW were building. “The balance of risks has shifted more to the downside since the budget – with heightened policy uncertainty, financial market volatility and an escalation of trade tensions,” it said.
No matter who wins government next month, the very big budget surpluses delivered during this term of government are unlikely to be repeated during the next.
With Ben Weir
Matt Wade is a senior writer at The Sydney Morning Herald.