The Australian Economy in 2018–2019: Convergence in Economic Activity across Australia Viet H. Nguyen and Jiao Wang* Abstract Economic activity in Australia continued to improve in 2017–2018 with growth spreading across the mainland state economies. Labour market conditions in Australia improved markedly in 2017–2018 while the inflation rate was steady around the lower end of the Reserve Bank of Australia’s2–3 per cent target band. Real wage growth was weak and is likely to remain weak in 2018–2019, putting down- ward pressure on household consumption. Output growth in 2018–2019 is likely to be solid with prospects of the Chinese economy and trade tensions between China and the United States posing the greatest downside risk to the Australian economy. ... [A]bstracting from the cyclical dynamics, there is a longer-run trend towards more similarity, rather than more divergence, in the underlying economic structure across the country. [Philip Lowe, Governor, Reserve Bank of Australia] 1. Introduction Growth in the Australian economy gained momentum in 2017–2018. Domestic final demand, and non-mining business investment and exports, identified in last year’s report as emerging positive trends (Robinson and Wang 2018), all contributed positively to output growth. Conditions in the labour market also improved. The unemployment rate fell to 5.1 per cent in October 2018. However, wages growth remained weak. The momentum was evenly spread across the state economies. In line with Philip Lowe’s appraisal, all state economies grew in 2017–2018, with Victoria (VIC) overtaking New South Wales (NSW) as the best perform- ing state. Queensland (QLD) and South Australia (SA) also posted solid growth while Western Australia (WA) emerged from the recession induced by the unwinding of mining investment. Output growth in 2018–2019 is likely to be solid (Table 1) with contribution from develop- ments in non-mining business investment. One caveat would be that while a pick-up in real wage growth is critical to support household consump- tion, the prospect of stronger wages growth is unclear in the current environment of subdued inflation and accommodative financial conditions. Prospects for the Chinese economy remain a key source of risk to the Australian economy compounded by trade tensions between * Nguyen and Wang: Melbourne Institute, Applied Economic and Social Research, University of Melbourne, Victoria 3010 Australia. Corresponding author: Nguyen, email <vietn@unimelb.edu.au>. The authors thank Guay Lim, Ian McDonald and Ross Williams for their helpful comments. The Australian Economic Review, vol. 52, no. 1, pp. 5–18 DOI: 10.1111/1467-8462.12316 ° C 2019 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research, Faculty of Business and Economics Published by John Wiley & Sons Australia, Ltd