Delays may sustain economic growth

All the stars continue to be aligned in favour of the Western Australian economy, on the back of a fourth successive year of above 30-year average real global economic growth. 

Despite any number of risks to the outlook for the global economy in 2007, they are still just that - risks - that may or may not crystallise to an extent what triggers a sharp slowing in the WA economy.

And even if they do, there is just so much momentum in the state, as commodity prices remain close to historical highs, that it would need to be a fairly significant shock to derail the state’s economy next year.

Beyond 2007, however, even if the global economy continues to grow at current rates, WA’s much vaunted business investment cycle may struggle to maintain momentum, after what is now an unprecedented contemporary trough to peak (so far) growth phase. 

As disappointing as delays are to major projects as a result of cost blow-outs and skill shortages, the delays may actually help to sustain economic growth longer than would otherwise be the case; a bit less activity now (and who would notice anyway?) but more later, when perhaps the pace of expansion in the global economy has eased back a notch or two.

Unless, that is, that by the time existing projects are completed and resources are freed up, the commodity price cycle has turned down markedly.

What would the slower parts of Australia’s so-called ‘two-speed economy’ give to have WA’s ‘problem’ of too much work all at once?

In any case, you would rather have work delayed by too much of a good thing than because of lack of demand.

The resource-rich, export-oriented WA economy has been at the top of the food chain as a result of China’s insatiable demand for commodities to fuel its industrialisation.

But conversely, WA is more exposed than those laggard, heavily-populated states in the south-eastern corner of the nation, to a sharp (rather than gradual) retreat in commodity prices.

Not that precipitous, simultaneous declines in iron ore, nickel, gold and alumina prices are, or should, form any base-case business model.

But volatility in base-metals markets - the coal mine canary - is a bit high for comfort, as the odd speculative position is unwound in the face of more than just the odd concern about the durability of the US economy, and just how much more can be squeezed out of China.   

WA’s burgeoning LNG export industry may yet cushion the state from the eventual and inevitable (yes, inevitable) decline in commodity prices.

While it is conceivable that the price of oil and its substitutes could fall away markedly if, for instance, a slowing US economy dragged China down with it, the actual and prospective supply constraints that have accentuated the run-up in oil prices are not going to disappear in a hurry, if ever.

Although the booming WA housing market took the May, and seemingly also the August, cash rate increases in its stride, the risk of another one this year is far from extinguished.

Moreover, in the context of a pre-election federal budget in May next year, monetary policy will probably have to grapple with fiscal stimulus, whether or not the economy needs it.

Nevertheless, just as there is plenty of business investment in the pipeline to keep activity turning over in WA, at least until 2008.

So too would you have to get a steep fall in residential building approvals to cause dwelling construction to fall in a heap.

Again, however, looking beyond 2007, it is not that difficult to imagine dwelling construction reaching a saturation point around 2008 or 2009.

And it’s even less of a stretch to see it coinciding with at least a gradual decline in commodity prices, in which case at least a couple of the stars would move to a different trajectory.   

• Alan Langford is chief economist at HBOS Australia.