Westpac warns NSW’s “economic engine” is running low on fuel.

“Private demand remains stalled and strength in public demand is starting to falter,” a report by the bank said. “It’s unclear where the spark needed to kick-start the NSW economy will emerge from,but there is no doubt that it is much needed.”

Westpac said robust population growth,mainly due to international student arrivals,has supported growth in NSW. Services exports rose to a record 6.9 per cent of annual state economic output last year.

“Without this boost,the performance of the NSW economy would likely look even bleaker,” the report said.

Employment growth has been resilient despite the subdued economic conditions;the state’s unemployment rate was 3.9 per cent in November.

Women’s workforce participation has been especially strong in NSW,hovering around a record 63 per cent of females aged over 15 years since the middle of last year.

Recent patterns of employment creation have underpinned this trend. There has been relatively strong jobs growth in sectors traditionally dominated by female workers during the past year,including healthcare and social assistance and education and training.

Even so,the half-yearly budget review warned the labour market would deteriorate in 2025 as the sluggish economic conditions took a toll on jobs.

It forecast unemployment in NSW would rise to 4.5 per cent by June – the worst since the economy was recovering from pandemic lockdowns in 2021. The state’s jobless rate is expected to remain well above the 4 per cent mark until 2027-28.

While inflationary pressures are easing in NSW,the budget review warned lingering geopolitical tensions along with economic policies proposed by US President-elect Donald Trump,including broad-based tariffs on imports to the US,threaten to reignite global inflation pressures.

A lack of new housing supply has emerged as a persistent economic challenge in NSW. While the government says increasing the supply of affordable and well-located dwellings is a top policy priority,economists warn the inefficiencies and costs associated with high rents and house prices will continue to hamper the NSW economy during 2025 and beyond.

But there is a bright spot for NSW in 2025:the prospect of interest rate cuts.

The Reserve Bank’s cash rate,which determines the level of mortgage interest rates,remained unchanged at a decade-high 4.35 per cent throughout 2024. But many market economists and investors expect official interest rates will fall in 2025.

Financial market futures contracts,which are a proxy for official interest rates,indicate a 75 per cent expectation that the Reserve Bank board will cut rates by 0.25 of a percentage point when it meets next month,and a 100 per cent expectation of a reduction by April.

For a borrower with a $600,000 home loan,each 0.25 per cent interest rate cut will reduce monthly mortgage repayments by about $100.

Commonwealth and Westpac have both forecast four rate cuts over the course of 2025 would reduce the cash rate by 1 percentage point.

That would be especially good for NSW,where many households have big mortgages due to the high cost of housing,especially in Sydney.

“Higher interest rates have been a real drag on the state economy,” Oliver says.

The NSW budget predicts the state economy will pick up momentum later in 2025 as interest rates fall and cost of living pressures ease.

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