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If COVID restrictions are not ‘long-lasting’ the impact will be minimal, says NAB

The rapid recovery in the economy over the past 9 months or so is evident across all states and territories  The impacts of both fiscal and monetary support can be seen in the pattern of growth within states – housing markets have strengthened, business investment has lifted and services consumption has continued to rebound rapidly.

The threat of shutdowns and other COVID-19 restrictions remains a risk. This is demonstrated by the recent Victorian lockdown, and the lockdowns or other COVID-19 related restrictions introduced in many states/territories (particularly in NSW but also WA, NT, Queensland and SA) and state border closures.

If the restrictions are not long-lasting (as assumed in our forecasts) the impact on the economy is not likely to be material, although this remains to be seen. At present the speed and age group rollout of vaccinations in each state varies significantly but as time progresses the coverage of vaccinations should converge and the risk and severity of shutdowns should dissipate.

The Q1 national accounts showed that all states except for Victoria have now recovered their pre-COVID level of state final demand (SFD). The smaller states (and territories) have shown a stronger rebound than NSW and Victoria. This outcome in part reflects a larger initial hit to activity in NSW and Victoria, the importance of international travel to these economies (tourism, students, migration) as well as a delayed recovery in the latter (in part due to the extended lockdown in H2 2020).

We expect solid growth to continue across the states going forward. The impact of federal government policies across the states will remain evident, with an ongoing boost to housing activity from HomeBuilder and low-interest rates continuing to play out, a pickup in business investment also driven by fiscal policy, alongside robust consumer demand and the recovery and rebalancing back towards services consumption underway.

Alongside the rebound in activity, state labour markets have recovered strongly. Employment is now at or above Feb-20 levels in all states with the exception of Tasmania and the NT which are around 0.6% and 1.4% lower, respectively. Unemployment rates have fallen notably across the states in H1, with the territories recording slightly smaller gains. Most states and territories are now around 0.5-1ppt lower than their 2019 average unemployment, while Victoria is around its 2019 average and NSW is around 0.5ppt higher.

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