30/06/2016 - 14:04

Brexit adds to hangover

30/06/2016 - 14:04


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Amid a few bright spots on the earnings front, the WA economy’s rebound is being thwarted by still-low global prices for iron ore.

EXPORT: Huge tonnages of iron ore are still leaving WA ports, but at significantly lower prices than in recent years.

Amid a few bright spots on the earnings front, the WA economy’s rebound is being thwarted by still-low global prices for iron ore.

Some financial years are best forgotten, and 2015-16 certainly fits that category, but looking back doesn’t answer the critical question of what 2016-17 is going to bring.

The quick answer is it will probably be a bit better than the year just past, but not significantly because the problems of last year continue to haunt the state’s business community – as all hangovers do after a particularly wild party, which was the boom of 2002 to 2012.

Layered on top of adjusting to the post-boom slowdown is the introduction of a wildcard with potentially negative effects, Britain’s likely exit from the European Union, which could trigger a break-up of the EU and further dampen demand for Western Australia’s major exports, thanks to the knock-on effects of a slower Europe on WA’s major trading partner, China.

With an economy more exposed to international markets than any other state, WA is hypersensitive to shifts in commodity prices. And while there has been some improvement from the low point reached in mid-January, the recovery is slow and fragile.

Hunting for good news in a sea of bad is a sobering experience because there appear to be only three industries enjoying the current stressful conditions.
• Agriculture: Thanks to one of the best starts to a winter cropping season in memory. If there is a problem for wheat farmers it lies in a low wheat price, offset somewhat by a weak $A.
• Gold: WA’s saviour in previous downturns, is once again coming to the aid of the state. The price is at an all-time high of around $A1,800 an ounce, and another leg up is possible thanks to the destabilising effect of Brexit on global markets.
• Lithium: A very modest contributor to the WA economy today but a significant new industry if demand for electric cars and their batteries, which are lithium-based, accelerates as some people expect.

Welcome as they are, those positives fall into the ‘clutching-at-straws’ category because they do not come close to overriding the fact that iron ore, the state’s (and Australia’s) biggest export is limping along at around $US51 a tonne compared with $US59/t 12 months ago.

To that mix you can add oil, which determines the price of liquefied natural gas exports; while the outlook is improving, at $US47 a barrel it remains well down on the $US58/bbl at this time last year.

Measured in multiple ways, the past 12 months have been simply awful. Perth property prices are lower, population growth has slipped to a historic low, and capital investment in new projects has crashed to levels last seen more than a decade ago.

Another way of measuring what’s happened since June 30 last year is through the share prices of companies that do much of their business in WA, including the two mining leaders, BHP Billiton and Rio Tinto, which are down 33 per cent and 18 per cent respectively.

Like iron ore, the prices for most other commodities (other than gold and lithium) are down, including nickel, which is looming as a crisis-commodity for WA and the state government (which cannot afford another round of project closures).

Nickel, however, is stuck in a glut of daunting dimensions, with a number of major producers refusing to cut production even though it is estimated that 70 per cent of the industry is losing money at the current price of $US4.07 a pound, down 26 per cent on last year’s $US5.50/lb.

From the heights of Australia’s fastest-growing state, WA has slipped to be the slowest growing; and while there are many ways of measuring economic growth, domestic final demand was that used by Westpac Institutional Bank as the first example of economic activity in the latest edition of its ‘Coast-to-Coast’ report, which looks at the states and their contribution to the national economy.

In the most recent 12-month period used by Westpac (to March 31), WA’s domestic final demand was down by 4.2 per cent, an improvement (just) on the 4.7 per cent decline in the previous 12 months.

The only other Australian state in negative territory was Queensland, where domestic final demand improved from - 2.4 per cent to -1.5 per cent.

The Australian average for the latest measure of growth in domestic final demand was 0.9 per cent, and even Tasmania, traditionally the slowest of the states, was in positive territory with growth of 2.1 per cent.

Ironically, the internal problems of WA’s slowdown are being offset by a surge in exports from projects built during the boom. Whereas WA once attracted the lion’s share of capital for the development of mines and gasfields, now it is generating the lion’s share of exports.

The building might have slowed to a crawl but the volumes of material moving across the wharves of WA’s ports is running at record levels.

As growth in the domestic economy declined last year, WA’s share of national exports increased to an astonishing 45 per cent, more than double the next closest state (NSW), with 19 per cent of national exports.

If WA could be seen in human terms, it has become an ungainly giant with overdeveloped export ‘muscles’ and a poorly developed domestic ‘brain’.

The shift from building to production and exports is forcing a painful period of adjustment, as a workforce swollen by construction workers shrinks to much smaller operational requirements.

Workers heading home to the eastern states or overseas helps explain why WA’s rate of population growth has dropped to a historic low and is less than the national average for the first time in decades.

Along with the end of a building boom has come a period of sharply lower prices for the state’s major exports.

Miners and petroleum producers (oil and gas) are struggling with low prices; and while that might seem a problem confined to those industries, they do represent a massive 34 per cent of the value-added component of the state’s economy, more than three times the national average of 9.3 per cent.

The boom, which is now just a memory, has left WA in a peculiar position of being astonishingly important to the rest of the country but poorer for the experience.

If that sounds odd, consider the way the state government is struggling with high debt levels at a time of falling tax revenue, especially from the GST, which is redistributed by the federal government using a method based on historic economic conditions, not current circumstances.

Selling a lot to the rest of the world, which is what WA’s iron ore, gas, gold and alumina industries do, is important but is not bringing sufficient revenue for the state government, which has been stung by depleted finances from the demands of the boom.

Being successful has also resulted in WA being penalised through a reduction in its share of GST. The irony is that if WA is less successful in future years it will claw back missing GST, but Australia itself will be poorer for the experience.

The outlook, especially for a once-booming state, is far from exciting.

The state government expects gross state product to grow by 1.25 per cent this financial year. Westpac says the number will be closer to 0.25 per cent.

“State demand peaked three and a half years ago, in September, 2012, and has decline by 10.7 per cent since then,” Westpac said in its ‘Coast-to-Coast’ report.

“Further sharp falls in business investment are in prospect over the year ahead.”


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