24/09/2013 - 15:58

Credit rating panic misplaced

24/09/2013 - 15:58


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Late storms are one way of looking at WA’s “winter of discontent”.

Late storms are one way of looking at WA's "winter of discontent". Another is the loss of the State's triple-A credit rating and, just as the storms will fade, so will the problems dogging the local economy thanks to encouraging signs of global growth.

Rather than panic, which is what the Treasurer, Troy Buswell, could be accused of doing by trundling out the totally unacceptable proposal of a state income tax, it would be far better for the government to fix what it can rather than propose possible miracle cures.

What Mr Buswell and his boss, Colin Barnett, seem to have forgotten, in their annoyance about the credit rating downgrade and refusal of newly-elected Prime Minister, Tony Abbott, to lend a helping with a change to the GST rules is that WA has an economy which is a mirror-image of a big resource company such as BHP Billiton or Rio Tinto.

When the fall in commodity prices hit those two companies they didn't complain about customers buying less copper, coal, aluminium and iron ore they embarked on a campaign of fixing their internal cost structures which had bloated during the boom.

Tough decisions had to be made, including the postponement by BHP Billiton of its plan for an outer harbour at Port Hedland, and the mothballing of a major expansion of its Olympic Dam copper and uranium mine.

With the cuts went thousands of jobs as the miners adjusted in the only way they can; cost cutting.

If Mr Buswell and Mr Barnett are serious about reclaiming the triple-A credit rating they have no choice but to expand on the modest cuts made so far and the odd transport project deferral. Sacrificing a few sacred cows might even be in order such as delaying construction of the proposed new football stadium.

Making unrealistic promises during this year's state election is one reason the WA budget is under pressure. In that regard Mr Buswell and Mr Barnett have no-one to blame but themselves.

Fixing the self-inflicted budget wounds is also in their hands, if they're prepared to mimic what happens in the private sector when revenues fall – cut costs, deeply and quickly

If they're prepared to cop the short-term criticism for making hard budget decisions now, they will be rewarded over the next few years as WA's growth rate picks up, driven by the surprisingly strong recovery underway in most of the world's big economies.

China's latest measures of manufacturing activity, as recorded in the purchasing manager's index (PMI) for September, was up to a solid 51.2, the highest for six months and pointing to overall economic expansion on track to hit the government target of 7.5% to 8% annual growth.

Europe, the U.S. and Japan are also tracking higher on their respective PMI readings with Europe the big surprise as its PMI rose to 52.1, the highest for 27 months.

In time, and this is the reason why Mr Buswell and Mr Barnett should relax a little and not appear to be in a state of panic, those PMI figures will flow through to commodity markets, and then into the WA economy.

At risk of being overly optimistic there is a reasonable chance that 2014 will produce the best global growth figures since the boom years before the 2008 financial crisis.

There will, of course, be bumps along the road to recovery, including the tricky job confronting the U.S. and Europe as they wind back on artificial monetary stimulus and try to achieve growth without an outbreak of inflation.

A measure of optimism that a way will be found to deliver strong growth after five recessionary years in most economies can be found in an unusual measure of consumer optimism – worldwide chocolate sales are booming.

While some addicts regard chocolate as an essential it is really a luxury that sells best in good times and right now sales are rising despite a sharp increase in the price of cocoa, the essential raw ingredient in chocolate.

As one London commodities trader told the Wall Street Journal yesterday: "The return of confidence has allowed the consumer to buy a bit more of the premium-brand chocolates".

Given the health benefits of chocolate, including reports of its ability the lower blood pressure, it might not be a bad thing if Mr Buswell and Mr Barnett found time to nibble a block of Cadbury's while contemplating the really hard budget cuts they will have to make.


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