According to Deloitte’s recently released WA Economic Outlook, the last six months have brought little good news for the Western Australian economy.
Estimates of global growth for 2019 have been revised down by the IMF, OECD and RBA in recent months. Uncertainty caused by rising geopolitical tensions, especially between the US and China, is the main culprit behind the global economic drag.
Though WA has escaped any direct negative effects of the US-China trade dispute, the slowdown in China’s domestic economy is expected to hit demand for WA exports in the near term.
Compounding this challenge, the State economy is still dealing with the effects of the decline in mining investment since the peak of the boom.
Household demand and business investment remain subdued, and efforts to stimulate the economy – mainly through spending on public infrastructure – are yet to move the dial.
The State’s real gross state product (GSP) grew by 1 per cent in 2018-19, slowing from the (revised) 2.5 per cent growth achieved in 2017-18. This figure fell short of forecasts by Deloitte Access Economics (1.9 per cent) and WA Treasury (2 per cent).
According to Deloitte, WA state final demand (a measure of domestic economic activity) fell by 1.2 per cent in 2018-19, driven in turn by a 9.1 per cent decline in business investment. The domestic economy has contracted in five of the last six years.
Economic growth is a numbers game, and WA does not have the numbers where it counts: population. The State’s population grew by just 1 per cent over the year ended March 2019, and despite a small uptick in net overseas migration, is still struggling with the net exodus of people to the eastern states.
However, the report outlines that the ‘spectacular increase’ in iron ore prices over the first half of 2019 – driven by the tragic collapse of a tailings dam in Brazil and the disruption to shipping caused by Cyclone Veronica – was a significant boost for WA’s mining sector.
But Deloitte states that it is important to remember that such price spikes affect the State’s income rather than its output, and a significant share of that increased income is expatriated to overseas shareholders and investors in the major iron ore miners.
While Beijing has shown its determination to meet growth targets, Chinese steel mills are working through large inventories of raw inputs, meaning there is likely to be little upward pressure on demand – and therefore prices – for new product.
With the shine coming off Australia’s major export industries, attention must be turned to the anaemic state of business investment in WA.
Given the State’s dependence on resources, it is no surprise that the profile of business investment closely follows the fortunes of the mineral and petroleum export sectors.
Little growth momentum to the wider economy can be expected from business investment in the absence of major new capital expansion by the resources sector.