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WA economy finding its ‘new normal’ - CCI Chief Economist Rick Newnham


Rick Newnham CCI4While we may need to recalibrate our expectations, it’s not all doom and gloom, says Chamber of Commerce and Industry (CCI) Chief Economist Rick Newnham. 

When I talk to our Members up and down St George’s Terrace, the mood is often bleak. It’s easy to see the once bustling cafes and restaurants now just a shadow of what they once were.

But when a savvy restaurant owner notices less foot traffic on the pavement outside, it will revamp the menu, rethink fine dining and expensive ingredients in favour of popular classics, lower their input costs and cater to the market. The restaurant can still thrive if it redefines potential in terms of what it can achieve given the environment outside.

The economy operates in a similar way, and just like the restaurant owner, we have had to redefine our post-boom potential.

If an economy is growing at a rate below its potential, then it is said to have some ‘spare capacity’.  Typically, there would be workers wanting to work more hours, more capital than normal would be sitting in safe financial instruments instead of high-return investments, and households would save a larger share of their disposable income.

It’s obvious that there is some spare capacity in the WA economy right now, but how far are we from our potential given what we could be achieving with the talent, capital and opportunities that are available? There are a few clues in the latest economic data that suggest our new potential is not the same as it was during the boom.

The unemployment rate in WA has fallen from a high of 6.8 per cent in November last year to 5.5 per cent in May, and there are 28,500 more full-time jobs in WA compared to this time last year. A falling participation rate coupled with the recent increase in interstate migration west to east has also helped keep the unemployment rate lower than it otherwise would have been. Together, these figures suggest that the spare capacity left in our labour market following the end of the mining investment boom is beginning to be put to good use.

If we still had the same potential we had during the boom and the economy reacted in the same way, we would expect to see wages growth start to increase as the search for jobs becomes less competitive, and inflation begins to pick up as people have more to spend.

But wages growth is likely to stay subdued for a while longer due to the public sector wage freeze policy of the State Government and even lower wage pressure in the private sector. Likewise, the level of inflation in Perth is still remarkably low for a city that became famous for $7 coffees during the height of the boom.

We must see the economy now in a different light. The best signal that the economy is growing at its potential may be when we see slightly higher unemployment and slightly lower wages growth and inflation than we got used to seeing during the boom.

Given this new level of potential in our economy, how is the outlook for growth in the WA economy? We only get one official read on the size of our economy every year, however there are quarterly data releases on our domestic economy—that is, the size of the economy without international trade.

For a while now our domestic economy has been shrinking, driven mainly by declines in business investment from the enormous highs that fuelled the boom. Fortunately, exports have been strong and have kept our whole economy growing. Our economic recovery will gather momentum once business investment reaches the bottom of its fall and we return to normal levels of mining investment.

The good news is that over the past two quarters we have seen the decline in business investment (and our domestic economy) slow right down, which may signal the beginning of the ‘new normal’.    

At the national level, the Australian economy is gathering some steam in sync with several other developed economies.

WA State Final Demand contributions to quarterly growth graph4

Source: Australian Bureau of Statistics

The March Quarter National Accounts marked a special milestone in Australia’s economic history. The national economy grew by 0.3 per cent in the March quarter, which is not especially impressive, but the outcome marked close to 26 years without a recession (the technical definition of a recession is two consecutive quarters of negative growth), handing us the world record previously held by The Netherlands.

26 years without recession graph

Past performance is not a reliable indicator of future performance.

Just like WA, the Australian economy is also experiencing relatively low wages growth and low inflation, given the positive news on economic growth.

The new normal in the WA economy is not a picture of doom and gloom. The high living standards we enjoy are closely tied to our economy operating at its potential, and there are new opportunities of which to take advantage. Just like the restaurant owner who changes his menu to keep diners coming through the door, the WA economy is changing speed to ensure everyone can still afford a seat at the table. 

Source: Rick Newnham appears courtesy of the Chamber of Commerce and Industry of Western Australia. 

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