What is the ANZ Stateometer?

{bs_lead]According to a new economic measure of Australia?s states and territories, NSW and Victoria have been the country?s top economic performers over the past year. The new ANZ Stateometer uses a set of composite indices for each state and territory, based on 16 economic indicators that cover labour market conditions, household and business activity, and prices, and found that economic activity in NSW and Victoria gained momentum over the past year and recorded growth rates above their long-run averages.

What is the ANZ Stateometer?

So what is the “Stateometer”? We caught up with ANZ Co-Head of Australian Economics, Cherelle Murphy, for a quick Q&A.

Q: What is the Stateometre and what does it measure?

A: The ANZ Stateometer is a measure of economic performance across Australia?s states and territories.

The set of composite indices for each state and territory are based on 16 economic indicators that cover labour market conditions, household and business activity, and prices.

The indices use monthly economic-related data and compile them into measures of economic activity using a statistical technique called principal component analysis (PCA). PCA allows us to reveal common trends in the data, and in our case, the underlying pulse of domestic economic activity for each state and territory.

The underlying set of monthly data is specified in year-ended terms and when compiled into an index reveals the pace of economic activity over the year. The ANZ Stateometer is presented as deviations around a state?s long-run average rate of year-ended growth. We also pay close attention to the rate of change, or underlying momentum, in each index.

The index has not been designed to conform to other official measures, such as state final demand. While they are correlated, the ANZ Stateometer is a reflection of available monthly data, and should be interpreted as such.

Q: How long has the Stateometer been running and what long-term analysis will you be able to do over time?

A: This is the inaugural ANZ Stateometer, but because we use pre-existing data we can run it back through history. Here is what the ANZ Stateometer results tell us back to 2005.

Q: Based on your current analysis of economic activity, what are the implications for the cash rate for the remainder of this year?

A: The ANZ Stateometer is showing us that while the two big states are going well, growth is still likely below trend. The RBA is likely to take a cautious approach to rates from here and we expect they are on hold for an extended period, although the risks to the cash rate remain tilted to the downside in the near term.

Current economic performance of the States

While the Stateometer shows a solid performance by NSW and Victoria, the news isn?t so good in other parts of the country.

Western Australia (WA) and SA are experiencing downward momentum caused by WA?s ongoing mining consolidation and SA?s weakening industrial sector. And while economic activity increased in the Northern Territory due to recent improvements in its labour market, it?s expected to remain well below its growth trend rate due to a likely ongoing decline in overall business investment.

Tasmania and Queensland share similar characteristics to the stronger states including solid housing and private consumption as well as the benefits of the depreciating Australian dollar. “We expect their below-trend lower momentum position on the ANZ Stateometer will change as these drivers lead to recovery rather than further deterioration,” said Ms Murphy.