Sydney and Melbourne Are Fueling Two-Thirds of Australian Growth

(Bloomberg) -- Australia's two largest cities now account for more than two-thirds of the nation's economic expansion, underscoring the concentration of growth drivers in a country that occupies an entire continent.

Sydney, the epicenter of a residential construction boom and infrastructure spree, contributed 41.6 percent of growth in the 12 months through June, a sharp increase on its average 28 percent since the start of the decade, consultancy SGS Economics & Planning said in a report Tuesday. Melbourne, which is seeing a surge in internal migration, made up 27.1 percent.

Australia's economy probably grew 0.7 percent in the three months through September and 3 percent from a year earlier, economists forecast before data due Wednesday. It's being driven by liquefied natural-gas fields coming online and exports ramping up, while a drag on growth from the unwinding of mining investment is ending.

Yet the fallout from the end of the mining boom is visible: Perth, capital of resource-rich Western Australia, detracted 15.8 percent from national growth last fiscal year and the state's regions cut 4 percent. Since the turn of the decade, they've added 10.4 percent and 8.6 percent respectively.

Terry Rawnsley, an economist at SGS, noted the challenge for the Reserve Bank of Australia given the scale of the economic divergence.

“The current RBA interest rate is too low for Sydney and Melbourne and too high for most of the rest of the country,” he said, referring to the record-low 1.5 percent benchmark that's expected to remain unchanged Tuesday for a 15th policy meeting.

In a hypothetical situation where each region had its own central bank, rates would be set at 3.5 percent for Sydney and 2.25 percent for Melbourne, Rawnsley estimates. For the rest of the country, excluding the Northern Territory and Canberra, they'd hover between 0.25 percent and 1 percent.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Chris Bourke, Peter Vercoe

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