A resurgent NSW was the only thing stopping the national economy from going into reverse last quarter, underlining the economic predicament facing the Abbott government as it marks its second anniversary.
The Australian economy would have shrunk by 1.1 per cent in the June quarter and flatlined last financial year without NSW's economic momentum, analysis by Commonwealth Bank's stockbroker, CommSec, shows.
Notwithstanding NSW's economic health the respected economist and former Reserve Bank board member, Warwick McKibbin, has warned there's now a 50 per cent chance Australia will slide into recession in the coming year.
Professor McKibbin told Fairfax Media the political "stalemate" over reform was now damaging the economy and warned the Reserve Bank had "already used up their ammunition" to boost growth.
"There aren't too many bright spots out there," Mr McKibbin said. "If you did absolutely nothing from now on…there is probably about 50 per cent probability over the next 12 months [of recession]".
Gross domestic product figures released on Wednesday showed the Australian economy grew by just 0.2 per cent in the June quarter and 2 per cent over the year.
CommSec economist Savanth Sebastian said the figures would have been far weaker if not for buoyant economic conditions in NSW.
"The NSW economy is well and truly ahead of the other states and territories now," he said.
On Monday it will be two years since the Abbott government came to power. The weaker than expected national growth has cast doubt on its budget figures.
Veteran budget watcher and Deloitte Access Economics director, Chris Richardson, said a lack of political bi-partisanship combined with wobbles in China meant "on the current trajectory, we have next to no chance of achieving a surplus in the coming decade".
Independent economist Saul Eslake told Fairfax Media it was "unlikely" the budget will return to surplus in 2019-20 without further policy action.
Professor McKibbin, who sat on the board of the Reserve Bank for a decade, warned the effect of further interest rate cuts might be limited.
"At this point, I don't think rate cuts will instil the confidence we need," he said.
Professor McKibbin called for income tax cuts, an increase in the GST, labour market reforms to allow employers to cut wages rather than jobs and more infrastructure spending to boost growth.
Mr Sebastian said the last time the national economy relied so heavily on NSW to register growth was in the December quarter of 1990. CommSec uses the Bureau of Statistics' quarterly GDP report to estimate the growth of each state economy by combining state final demand figures with net exports. CommSec says this provides the "best description of the performance of state and territory economies".
It showed that NSW and Victoria grew at a solid pace in the June quarter, but the resources-rich economies of Queensland, Western Australia and the Northern Territory all contracted.
The analysis draws attention to how heavily the national economy is relying on NSW amid the transition following the mining boom.
Earlier this week, a new ANZ Bank "Stateometer" that measures economic performance in the states and territories showed NSW was "pulling ahead of the pack".
Mr Eslake said the Abbott government's excessive focus on national security was breeding anxiety and making consumers more risk averse.
"I think it has taken an economic toll," he said. "The Coalition keeps telling people that you ought to be scared. We need to be scared about border security, food security, water security. We keep telling people there's bad stuff out there and no wonder they become risk averse."
