2006 was the year in which the two-speed economy became firmly entrenched – the already strong economic growth in the resource rich states of Western Australia and, to a lesser extent, Queensland and South Australia continued unabated, while the nation’s traditional leaders, New South Wales and Victoria, lagged behind.

The main driver behind the two-speed economy is, of course, the commodity boom. The impacts of skyrocketing prices for our commodities are huge mining profits, an expansion in capital spending as well as robust employment. The amount of extra cash in the Government coffers, thanks to rapidly increasing company tax receipts, is almost too large to discuss.

But it is not simply a case of New South Wales and Victoria being left behind in a cloud of dust – the commodity boom has to an extent hurt the resource-poor states. As has been often pointed out, high commodity prices place upward pressure on the Aussie dollar, making imports cheaper and exports more expensive.

It is no surprise, then, that Australia’s manufacturing sector has experienced a downturn, and the impact of the drought, which has included plummeting crop yields, low stock prices and bushfires, has further hurt the already suffering agricultural sector, sometimes beyond repair.

The first economic indicators released in 2007 suggest that the two-speed economy is continuing. Yesterday’s retail trade figures showed sales were up 0.8% in November in Western Australia, while NSW was flat. Monday’s building approvals data for November showed building approvals rose by 17.2% in SA, while WA recorded an 18.5% jump. This is compared with a national rate of only 4.1%.

Also, as reported in yesterday’s Fin, apprenticeship drop-out rates further highlight this two-speed economy: “the real surprise was the huge differences recorded between states, with completion rates in Western Australia and Queensland almost twice as high as those in NSW and Victoria”.

The two-speed economy obviously has some road to travel before it begins to even out, and Henry would expect further significant changes in the composition of industry and the regional distribution of economic activity before that day comes.

Read more at Henry Thornton.