The report, published by the NSW Department of Trade and Investmenton Thursday, says the state benefits from a diverse economy with particular strengths in knowledge-based industries such as finance, professional and technical services, IT, media and telecommunications. Knowledge-based sectors now account for nearly a quarter of NSW's gross state product. The report says the state economy gained momentum in 2013-14 and is "emerging as the engine room of the national economy".

Even so, the state's rate of labour productivity growth has lagged the national average over the past five years. And that's despite metropolitan Sydney being the most productive of the major Australian cities. Between 2003 and 2013 gross value added per hour worked in Sydney rose from $72 to $81 – substantially higher than the weighted average for Australia's other major cities, which increased from $67 to $72 in the same period.

The report warns that NSW's ability to improve its standard of living in future depends almost entirely on its ability to raise its output per worker.

"Continued effort is required to build a skilled workforce and to create an environment in which industry can undertake improvements to enhance productivity and competitiveness," it said. "Government investment in skills has the potential to improve this result."

The report also found export growth in key sectors of the NSW economy has been "underperforming" compared with the rest of Australia. This includes international education, manufacturing, tourism and professional services. The global financial crisis had a major impact on services exports – nearly half of the value of NSW finance and insurance exports was lost following the crisis and has still not recovered to the 2006-07 peak in dollar terms. A nationwide decline in international education exports caused by the high value of the dollar and strong competition from overseas markets has been more pronounced in NSW than elsewhere, although international education remains NSW's second-largest source of export revenue, and the state's top service export.

NSW continues to be Australia's largest exporter of services but has been losing its national share of exports to Victoria across a number of service-based industries. In 2002-03, NSW accounted for 43.9 per cent of national services exports, more than double Victoria's share of 20.8 per cent. But that 23.2 percentage point gap had narrowed to 15.3 percentage points by 2012-13.

"A slower rate of export growth compared with Australia as a whole will also result in NSW's share of national exports continuing to decline over time," the report said.

Over the past five years NSW has increased its share of national industry value added (a measure of output) in four "priority sectors" identified by the state government – manufacturing, creative industries, the digital economy and agriculture. "NSW has consolidated its position as Australia's leading manufacturing state, with significant manufacturing activity under way in western Sydney and regional NSW," the report, called Progressing the NSW Economic Development Framework, said.

The state's national share of industry value added was maintained in two other priority sectors – professional services and tourism – over the past five years.

The report underscores how NSW is a dominant force in finance – the state accounts for more than 46 per cent of Australia's financial and insurance services sector. While the contribution to the NSW economy made by the mining industry has grown substantially since the mining boom, it accounts for only 2.7 per cent of the state's economy.