NSW is "getting its act together" thanks to increased retail spending and housing construction, as nearly a year of record-low interest rates helps kick along the nation's heavyweight economy.
The Reserve Bank has left the cash rate unchanged at 2.5 per cent since August last year, which has boosted home building across the country but particularly in NSW, a Deloitte Access Economics Business Outlook report says.
NSW recently took over from Victoria for building approvals for the first time in a decade, with new dwelling starts up 21.9 per cent across the country on last year, according to the Australia Bureau of Statistics.
"NSW's housing construction sector has been in the doldrums for some years but is exiting that period of hibernation at speed," the report said.
The report said a surge in house prices in Sydney was prompting more home owners to build new homes rather than buy. It also forecast interest rates to remain unchanged for the rest of 2014.
Deloitte predicted NSW gross state product to rise by 3 per cent in 2014-15, before falling back to 2.3 per cent in the years after that.
The other heavyweight state Victoria, meanwhile, continued to be hurt by a "rampant" Australian dollar, which is impacting on exports in both the manufacturing and education sectors.
Deloitte said Victoria would see a gross state product rise of 1.9 per cent next financial year, caused in part by the exit of car manufacturers Ford, Holden and Toyota.
"NSW has lifted and Victoria has drifted," the report said.
"In part that's because NSW is more sensitive for interest rates, whereas Victoria's economy is more closely tied to the Australian dollar."
Deloitte said a slowing China could be offset by increasing activity in the US, leaving growth among Australia's trading partners close to trend.
National economic growth was being underpinned by the export phase of the resources boom, the report said, with the construction phase also lingering longer than expected.
Housing was also a focus of the Commonwealth Bank's State of the States report, which said NSW was building momentum thanks to construction.
"NSW remains the strongest in the nation for new home construction, with starts almost 45 per cent above decade averages," the report said.
According to both reports, Western Australia remained the best performing economy thanks to continuing growth in the mining sector.