WESTERN Australia's insulation from the global financial market turmoil is getting thinner by the day, as the risk of a significant and broadly based decline in commodity prices rises with each disturbing escalation of the credit crunch.
WESTERN Australia's insulation from the global financial market turmoil is getting thinner by the day, as the risk of a significant and broadly based decline in commodity prices rises with each disturbing escalation of the credit crunch.
Until recently, it has been legitimate to contend that Western Australia's direct engagement with China's seemingly insatiable appetite for all manner of commodities would underpin the maintenance of strong growth in the state into 2009.
It may still, but equally it would be naively optimistic to assume that China will remain unaffected by events in the major industrialised economies.
It is too early to factor in a steep fall in iron ore prices when the big producers thrash out next year's contract prices with their major customers.
Moreover, the stunning fall in the Australian dollar has offset most of the decline in the prices of commodities that are more actively traded on global spot markets.
Nevertheless, it is difficult to imagine a more capital-intensive economy than WA's anywhere in the world, so it cannot help but be adversely affected by such a major disruption to global capital markets.
Liquefied natural gas (LNG) may yet prove to be the commodity that protects Western Australia from recession in most of the rest of the world if its price is held up by the oil price.
But even that is diving under the weight of expectations that rapidly slowing world economic growth will carry more weight than actual and prospective supply constraints.
However, LNG's role as a bridge to a less carbon-intensive global economy may over-ride concerns about economic growth in the medium-term. But even LNG's bridging role may be difficult to finance until co-ordinated government action to unfreeze debt markets bear fruit.
The strong recovery in global equity markets in response to unprecedented intervention by governments around the world over the weekend of October 11 and 12 suggests that the beginning of the end of the credit crunch may at last be in sight.
But the damage it has already caused to the broader economy is yet to be tallied.
Accordingly, even if the credit crunch were to end tomorrow - which it won't - the economy as a whole will be constrained by the aftermath, including the massive costs to governments of the rescue, until well into 2009, if not the following year.
As in all states, Western Australia's housing market is sensitive to the level of interest rates, which are at least falling as the Reserve Bank of Australia aggressively lowers the cash rate to ease the burden of the credit crunch on households' budgets.
But the commodity price cycle is not far behind as a driver of house prices and construction of new dwellings.
Unless population growth slows sharply, it is reasonable to expect a cyclical recovery in dwelling construction to emerge next year.
But that will only happen if business investment remains robust enough to keep recent arrivals in the state earning the high wage jobs that underpin household consumption and the demand for residential dwellings.
- Alan Langford is the chief economist at HBOS Australia.
