THE global financial crisis has been an unmitigated disaster for investors and looks like getting worse, but the impact on the business sector in Western Australia is far from clear-cut.
THE global financial crisis has been an unmitigated disaster for investors and looks like getting worse, but the impact on the business sector in Western Australia is far from clear-cut.
The critical question for WA is whether the all-important Chinese economy can sustain high growth in the face of a sharply deteriorating global economic outlook.
It's pretty much impossible to answer that question conclusively in the current environment.
Economists and business planners around the world will be reviewing their forecasts but it will be difficult to get anything meaningful until the volatility in markets dissipates.
When investors are driven by fear, as seems to be the case this week, then all of the accepted rules of analysis go out the window.
However, it is possible to distil some of the key trends in markets around the world.
It seemed to be only a few weeks ago when the received wisdom was that the 'financial crisis' was restricted to banks and investors with a big exposure to sub-prime securities in the US.
That has rapidly turned into an alarming loss of confidence in the banking system in US and Europe.
More than 30 international banks have either failed or, more often, been forced into a fire-sale merger over the past few months.
The wider ramifications have been a sharp rise in wholesale funding costs, and in some cases the drying up of wholesale funding as banks and investors refuse to deal with each other.
There has also been a sharp tightening of credit, which has affected the business sector at large
As well as the tightening of debt funding, the equity markets have become barren, with a dearth of initial public offerings and secondary capital raisings.
The woeful state of the equity market is highlighted by the fact the Australian market, measured by the S&P/ASX200 index, is down more than one third in value since peaking last November.
As a result, a raft of Australian companies, mostly in the resources sector, has shelved spending plans in the interests of conserving cash.
Mortgage broking and stock broking have been hit hard, as has the property industry.
Property values have fallen, sales activity has declined, and development activity is slowing.
In many businesses in WA, there are anecdotal reports that employers are not replacing staff who leave.
There seems little doubt that the global economy is facing a major slowdown and is probably already in recession.
That will adversely affect commodity prices, which in most cases are well below their peak levels.
That, in turn, will adversely affect the earnings outlook for most resources companies, from the giants such as BHP Billiton and Rio Tinto down to the minnows.
Investors have already been badly hit and they face more pain. Superannuation funds face the prospect of a second year of negative returns, and there is no respite for investors in the local property market, with housing prices falling 10 per cent in Perth,
Where does this leave WA?
In recent years, big resources and infrastructure projects have driven growth in this state.
A handful of big companies have led WA's projects boom - BHP Billiton, Rio Tinto, Woodside, Fortescue Metals Group, and CITIC Pacific to name the most significant. Sitting behind them has been China. It has been widely argued that China's growth is fundamentally internally driven, reflecting trends like rapid urbanisation, and is not reliant on exports.
If this view is correct, China's high growth will continue, maybe not at 10 per cent a year but close to it.
Rio Tinto chief executive Tom Albanese and FMG director Graeme Rowley have been asserting this month that the China story still holds true.
If that is correct, prices for iron ore and liquefied natural gas will be sustained at comparatively high levels and investment will continue to flow into big WA resources projects.
The global financial crisis has been a bitter blow for the small and mid-cap miners that have been forced to shelve their project development plans.
This will have an adverse effect, but the outlook will get much scarier if companies like BHP and Woodside defer or halt big projects.
Apart from the China factor, the other important consideration for WA is the health of Australia's banks.
The biggest worry has been the rise in wholesale funding costs, which is putting pressure on both lending rates (bad for business) and profit margins (bad for investors).
That's a lot better than other jurisdictions, where bank funding has completely dried up.
The fact that Australia has been debating whether banks should fully pass on cuts in official interest rates, while the rest of the world debates rescuing an industry in crisis, says a lot about our relative good fortune.
