Driving WA’s economic machinery

Western Australia’s domestic economy continues to grow, according to the latest quarterly national accounts data from the Australian Bureau of Statistics.

WA’s premier and treasurer, Mark McGowan, welcomed the 2.2 per cent increase in state final demand over the March quarter, a level of growth topped only by Victoria.

These latest growth figures have lifted the value of WA’s domestic economy by 8.8 per cent since the start of the pandemic, the strongest recovery of any state.

But what’s behind the state’s continued strong economic performance, and what prospects are there for growth to continue over the remainder of the year?

Much of the state’s economic growth after the initial phase of COVID-19 came from household consumption growth, with spending reinforced by the JobKeeper wage subsidy, the JobSeeker supplement, and electricity credits.

Housing stimulus measures to incentivise new housing purchases also played their part in driving economic activity and supporting the state’s recovery.

However, these incentives are no longer available and building approvals have dropped to pre-pandemic levels, with construction businesses working through the backlog of building works in the pipeline against some strong headwinds from supply constraints, skills shortages and rising costs.

Meanwhile, household stimulus measures have worked their way through the system, and the combination of rising costs of living, the Reserve Bank of Australia’s latest 50 basis point increase in the cash rate, and prospects of further interest rate hikes over the next year are all putting a brake on continued retail activity.

So, what’s keeping the state’s economy moving ahead so strongly over the past quarter?

The answer is a combination of government consumption spending and capital investment in machinery and equipment, in roughly equal measure.

Most of the extra government spending has been in health to further bolster protections against the Omicron variant of COVID in the face of the opening up of borders and relaxation of restrictions as WA learns to live with the virus.

And growth of 14.8 per cent in machinery and equipment investment by the state’s businesses accounted for nearly half of the state’s domestic economic growth over the first quarter.

Most of this has come in the form of heavy machinery, farm equipment and new capital to support engineering construction in the mining sector, alongside strong growth in the purchase of commercial vehicles as supply challenges have eased.

But this isn’t yet enough to signal a sustainable return of business confidence.

New non-dwelling building construction dropped by 3.8 per cent over the March quarter on the back of a fall in approvals.

The recent cash rate increases by the RBA are very much the shape of things to come, over the next year at least, which means more small businesses will think twice about taking out loans to invest in their operations as a result.

Also, the global trading environment and recent stock markets volatilities are both taking their toll on confidence.

Taken together, these heightened uncertainties are bringing a degree of caution to many business operations.

This is an important time for the WA economy, and there’s work to be done to capitalise on the state’s advantages against a moving international business landscape.

While the WA economy continues to benefit from the strength of the resources sector, there’s never been a more important time for the state to push forward with its diversification agenda.

And with climate action now enjoying significant national support under the Albanese government, the state is in a strong position to reap the rewards of investment in its renewable energy sector.

• Professor Alan Duncan is director of the Bankwest Curtin Economics Centre