WA Super News
Foundations for growth
It’s official: WA’s economy contracted last year. The Australian Bureau of Statistics (ABS) figures released in November 2017 revealed that overall the WA economy was 2.7 per cent smaller in 2016-17 compared to the previous financial year. This is the first time the state’s economy has contracted in a single year since the data started to be recorded in 1990. The contraction amounts to $6.4 billion less economic activity in WA — including all household consumption, business investment, government spending and exports minus imports. It took most by surprise.
While WA’s economy contracted significantly over the year, we were lucky to escape without the usual devastating effects of a recession. One of the hallmarks of a recession is a significant increase in unemployment, which WA has not experienced despite how tough it has been for some to find work in the past year.
The average jobless rate for 2016-17 was 6.2 per cent, which is only slightly more than the 6 per cent WA experienced the year prior. At one point last year, WA had the second lowest rate out of all the states. Although WA’s joblessness rate masks some of the more troubling issues that lie beneath the surface — namely significant underemployment and negative net interstate migration — we have not experienced the drastic unemployment expected from a recession.
For example, the high unemployment, inflation and interest rates that crippled households 26 years ago in the recession we ‘had to have’ have not been a reality in WA.
This is partly because the rest of the nation’s economy has continued to grow. The key to our state economy’s contraction last year is reflected in business investment coming off the height of the boom. It is not a plunge into stagnation that will shock households and empty the roads, trains and buses to work. We have largely escaped unscathed.
Wages growth has caused some concern in the developed world and WA is no exception. It has been in decline since the peak of the boom. It is an important part of our recovery as wages growth helps drive consumption. With more money in hand from work, consumers are happier spending more. The Governor of the Reserve Bank, Phil Lowe, suggested recently that one reason for weak wages growth could be that businesses are feeling the pressure of increased competition and are focused on cutting costs as much as possible. He suggests, too, that workers feel a threat of overseas competition and technological change on their jobs and ultimately believe they are in a weaker position to negotiate higher wages. While we are likely to see public sector wages growth remain low in the foreseeable future with the State Government’s restructure of the public service, we expect to see some evidence of upwards wage pressure in the private sector after business investment reaches the bottom of its fall.
In CCI’s economic forecasts published in the July edition of Outlook, we included forecasts for what we expected from 2016-17. We were spot on with how much business investment would fall, which is the biggest drag on the economy. Major projects have come to an end and this is represented by falling investment. Household consumption however, which is now a much larger factor in the overall economy’s growth, was slightly weaker in 2016-17 than we were expecting (even weaker than the ABS was expecting just a couple of months ago). We also imported more into WA than we were expecting while spending less domestically. Imports represent a ‘leakage’ from the WA economy as dollars leave the state, dragging our total output down. Overall, this meant that while business investment was falling predictably, the falling household consumption was surprising — as was the strength in imports.
The WA economy is standing on a more stable foundation than at the start of 2017 when unemployment was reported at 6.9 per cent, full-time jobs were in decline, and confidence amongst the business community was stalling due to the uncertain political outlook. Fast forward to late 2017 and unemployment has fallen to 5.9 per cent with 30,000 more full-time jobs than at the start of the year.
WA business has come out the other side more resilient and more optimistic. WA business confidence has reached a near 3-year high in the most recent quarter. More confident businesses invest more and hire more staff — this in turns builds confidence among consumers.
Although last year’s economic contraction was disappointing we have been lucky to not experience the major increases in joblessness, inflation and interest rates that devastated households in 1990-91. What’s more, we have come out the other side with high consumer and business confidence, which bodes well for WA’s economic future.