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The Western Australian economy is back from the brink


The Western Australian economy is back from the brink and optimism is returning to businesses and households alike, says CCI Chief Economist Rick Newnham

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The Western Australian economy is back from the brink and optimism is returning to businesses and households alike.

Signs are optimistic for the future in WA, not just as a result of our State’s rejuvenated resources sector, but in sectors where industry and government are working together to diversify the economy.

However, the WA economy is more exposed than ever to global risks that impact on world trade. As an export exposed nation and State, we depend on free trade and low barriers for our livelihood, making the risks to WA’s economic recovery vast. 

We only have to look at trade tensions between the United States (our largest foreign direct investor) and China (the leading buyer of our exports) to see how trade tensions put us in a tricky position.

When US President Donald Trump declared in March that he planned to impose a raft of tariffs on imports from China the prospect of a trade war between the world’s two largest economies spooked stock markets.  

China's Shanghai composite index, which includes the shares of many companies that would be hurt by the levies, fell sharply by 3 per cent. 

In the US, the S&P 500 and Dow Jones Industrial average dropped by 2.5 per cent and 2.9 per cent respectively. 

Trade wars, despite what we are sometimes told, do not benefit anyone in the long run. 

In June, President Trump said he would put a 10 per cent tariff on an additional $200 billion worth of Chinese goods.

Modelling by KPMG has estimated that an all-out trade war would result in the global economy shrinking over a prolonged period. After five years, world GDP is estimated to be around 3.5 per cent lower in the event of a trade war.

As a trading nation this should alarm every Australian. 

For Australia, GDP in five years’ time is estimated at 2.4 per cent lower than it would have been in the absence of a trade war. For WA, the hit would be much harder than any other state. 

Thankfully, it appears that trade tensions may be easing between the two nations after productive talks at the G20 recently. However, if there is one thing we can say with certainty in 2018, it is that there is no longer any certainty in global politics. 

Diversifying the economy helps us protect against uncertainties and shocks (such as a global trade war), by ensuring all of our economic eggs aren’t in the same basket. 

The resources boom took us to unprecedented heights, with business investment reaching its peak in 2011-12 at $80 billion a year. It also took us to difficult lows as business investment dropped off a cliff soon after, which would have been softened if the economy was less concentrated. 

CCI forecasts that WA is now at least 95 per cent of the way down the business investment cliff, which means the sharpest decline in investment is behind us. We also believe that exports will grow by around 6 per cent this year as more LNG and iron ore is shipped abroad and commodity prices rally slightly higher than last year.  

Once investment returns to positive territory and steady jobs growth returns, we will see the entire economy start to recover.

Mining businesses are leading the growth in confidence in the WA economy, with every business in the mining sector surveyed in the latest WA Super–CCI Business ConfidenceSurvey expecting stronger economic conditions for the year ahead. 

Over half of the miners surveyed (57%) identified that they expect to increase their capital expenditure and labour costs in the next quarter. This strength in mining confidence and conditions is also reflected in the increased demand for skilled workers, with SEEK job ads in the mining industry up 23 per cent over the year – the highest growth across any industry in the country.

WA’s resources giants are also undertaking significant outlays to find, build or replace mines, with mineral and petroleum expenditure in WA up $45 million since last quarter.

This highlights that although WA’s mining sector kicked off our State’s downturn, it will also lead its resurgence, with WA’s resources sector continuing to account for more than 40 per cent of the nation’s merchandise exports. 

While iron ore and LNG have taken centre stage in the WA economy over the last decade, lithium is about to play a more prominent role as demand for battery materials booms around the world. 

CCI recently released the State’s most comprehensive industry-led research into WA’s Future in the Lithium Battery Value Chain. The report reveals that WA is well positioned to benefit from current and new opportunities in the global battery supply chain, but to maximise the value to WA we must play to our State’s strengths. We must not be drawn to the bright lights of industries in which we are not globally competitive. 

While WA certainly has a strong future in continuing our exports of lithium, we are not competitive in manufacturing batteries when compared to more experienced, and in many cases cheaper, battery manufacturing nations. Playing to our strengths ensures our industries, and the jobs that come with them, are sustainable and competitive over the long term.

With a Federal election on the horizon, now almost certainly in May 2019, the community will turn its focus to the priorities outlined by each major party. The business community will be looking for policies than ensure they can continue to invest and create new jobs.

We depend on our global competitiveness, which is why it’s crucial for business to be front of mind when the major parties develop their platforms for the election. We will be looking closely at this in the next column, with a critical eye on how these policies will help or hinder WA’s economic recovery. 

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

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