WA Super News

Optimism shines

12/07/2018

WA has hit the bottom of the business investment cliff and it’s all uphill from here, says CCI Chief Economist Rick NewnhamCCI logo

Business investment was the driving force of economic growth during the mining boom but has been the brake on economic growth since the boom ended. The good news, finally, is that business investment has stopped falling and has remained relatively flat.

CCI believes WA is roughly 95 per cent of the way down the ‘business investment cliff,’ with the sharpest falls now behind us. With the announcement of several new major investments in the resources sector in the second quarter, business investment is set to grow in 2018-19.

Much of the latest investment will be directed at WA’s two staple commodities: gas and iron ore. Chevron has approved its multi-billion dollar Gorgon Stage Two project and expects to begin offshore drilling next year. And Woodside is due to begin front end engineering design (FEED) in the first quarter of next year for its Scarborough project, due to be approved in late 2020.

In iron ore, two big mine replacement projects have recently been approved: BHP’s $4.5 billion South Flank development and Fortescue’s $1.7b Eliwana venture. These are likely to be followed later this year by Rio Tinto’s $2.9b Koodaideri project.

We have revised up our previous forecast for business investment and believe the economy will grow more than previously expected in 2017-18. Domestic economic activity, which excludes exports, was previously forecast to fall by 2.5 per cent but this has been revised up to fall just 0.4 per cent.

Similarly, our central forecast for growth in the whole economy, including exports, has been revised up from 0.9 per cent to 1.3 per cent. This is great news for the future of the WA economy.

Confidence is picking up too. The latest edition of the WA Super–CCI Survey of Business Confidence shows businesses are as confident in the economy as they have been since the resources investment boom – the highest level since 2011.

Mining businesses continue to be the most optimistic about the state of the WA economy. Around 50 per cent of mining businesses expected to increase capital expenditure in the previous June quarter, in contrast to just 21 per cent of manufacturing businesses.

The good news also extends to households. We have cautiously kept our forecast for household consumption at 1 per cent, but there is a good chance that the official figures at year’s end could be higher. The CCI Survey of Consumer Confidence shows that optimism in households is at a four‑year high. Several factors are supporting this revival, with a stable political environment, subdued interest rates and minimal inflationary pressures identified by respondents as low concern.

On the downside, the labour market has worsened over the last financial year. The unemployment rate was as low as 5.3 per cent in July last year but has since peaked at 6.9 per cent in March. Given this extra capacity in the labour market, wages growth and inflation will probably recover a bit slower than previously thought. However, some CCI Members are starting to identify skills shortage risks in key input industries like construction, which could support a faster pick up in wages.

There has been legitimate concern in the community about workers not getting enough hours, but not everyone wants to work full-time. When we dive into the data, we see that the proportion of part-time workers who would prefer to be working more hours has declined from 33 per cent to 28 per cent over the past year and a half. It seems that more people are finding the right types of jobs to suit their personal circumstances.

We are optimistic about the state of the WA economy in 2018-19. With a string of recent project announcements in the mining sector, there is a lot to look forward to. A return to growing business investment will support stronger wages, stronger household consumption, stronger government finances and a stronger economy.

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

Return to top