Australia should look to fiscal stimulus in two-speed economy: bank

Australia should look to fiscal stimulus to kick start sluggish growth in an economy now operating at two-speeds, the country's largest lender said on Tuesday.

The two-speed economy observed during the mining investment and construction boom has shifted to the eastern states, led by New South Wales and Victoria states, Commonwealth Bank of Australia (CBA) said in a note to clients.

"In fact, it's largely Sydney and Melbourne propping up national incomes," CBA senior economist Gareth Aird said.

"The big influence that NSW and Victoria have on the national figures means that pretty soft conditions throughout the rest of Australia have flown under the radar."

Headline figures show Australia growing at 3.3 percent over the year to June thanks to public investment in transport infrastructure by state economies offsetting the falls in Australia's resources sector. These public works are occurring in New South Wales (NSW) state and Victoria.

"For the rest of Australia, business investment is down 17.2 percent through the year to the second quarter 2016 ... driven by a huge fall in spending in Queensland state and Western Australia state because of the downturn in mining capex," Aird said, conceding the Australian Capital Territory has seen a lift in business investment.

"This is a pretty poor result considering the stimulus that has come through from lower interest rates and a lower Australian dollar."

On all metrics including dwelling prices, building approvals, employment growth and unemployment, the two eastern states are decidedly stronger.

The unemployment rate however is not as useful an indicator to determine the labour market's slack as underemployment has been rising across Australia, leading to weak wage growth.

"Normally, softness in the labor market and below-target inflation would imply that policy easing is forthcoming," Aird said, adding it would boost activity in Australia's tradables sector.

The Reserve Bank of Australia (RBA) however are reluctant to cut given the strength in the Sydney and Melbourne property markets.

"The lesson here is that the new two-speed economy means that currently monetary policy settings are likely to be suboptimal for the rest of Australia outside of Sydney and Melbourne," Aird said, noting should those markets stall, easing would come back on the agenda.

"Of course, that stimulus could come via fiscal policy."

Economists have previously called for the central government to increase fiscal stimulus as the sluggish income growth, combined with ongoing global economic and political uncertainty is making households and businesses cautious to respond to changes in monetary policy.

Australia however are continuing their austerity measures in a bid to shore up their coveted triple-A credit rating.

But global ratings agencies have warned Australia a halt to ballooning government spending was not enough to ensure sovereign AAA ratings were maintained, arguing revenue raising measures are also needed to curb growing debt which was "credit negative." Endit