WA keeps rolling on
Just when the pessimists were starting to gain the upper hand in the debate over our economic prospects, along comes the prospect of another giant resources project to bolster Western Australia’s outlook.
This week’s announcement that Chevron Australia is looking to develop a liquefied natural gas project near Karratha has added to the extraordinary boom conditions, in the Pilbara in particular and WA in general.
It joins a long queue of other prospective resource projects in oil and gas, iron ore, gold, alumina, nickel and other more obscure commodities like molybdenum and vanadium.
The money and people pouring into WA to support these projects makes the troubles facing many east coast businesses seem very remote.
Remember a couple of months ago when Centro Properties and Centro Retail Group got into strife?
They are still trying to extricate themselves from their troubles, which flowed from financial engineering that was too clever and too aggressive for their own good.
Centro has been joined by the likes of Allco Finance Group and its various offshoots, MFS, City Pacific, Challenger Financial and ABC Learning.
All of these groups have been hammered by stockmarket investors because of concern about their prospects, in some cases their commercial viability, and in most cases the financial health of their directors and major shareholders.
It’s the kind of problem that many commentators have associated with so-called ‘wild west’ entrepreneurs, so its intriguing to see the problem become prevalent on the east coast.
It would be rash to suggest WA would remain immune from these sorts of problems.
Don’t forget, the remnants of Norm Carey’s failed Westpoint group are still being cleaned up by an army of administrators and receivers.
Nonetheless, there continues to be a great air of optimism in Perth, which contrasts with the pall of gloom settling on many investors and business advisers on the other side of the country.
The gloom partly reflects the problems that have already come to light.
It also reflects the fact that nobody is sure just how bad conditions will get.
Which company will get into financial strife next?
Which director will be forced to sell their shares after getting a margin call from their banker or broker?
Strong economy should protect banks
The more extreme pessimists seem to believe the problems could extend into blue chip banks.
There is a certain logic to this line of argument.
The problem started in the United States’ sub-prime housing loans market, which turned out to be bigger and shakier than most of us had appreciated.
That has cascaded through the financial system, impacting on liquidity, pushing up wholesale funding costs and more recently generating loose talk of a credit squeeze.
That’s a phrase I hadn’t heard since the years of the Whitlam government, when governments had the ability to dictate lending volumes by banks.
Australia’s major banks have been bruised by investors, defying their reputation as blue chip stocks.
The sell-off has been even more extreme for investment banks like Macquarie Group and Babcock & Brown.
The major banks’ earnings are likely to suffer as they reveal their exposure to sub-prime home buyers and flaky entrepreneurs, but given the overall strength of the Australian economy and their robust balance sheets, its hard to see the Australian banks getting into serious trouble.
That should provide some comfort to the many creditworthy home buyers and businesses that will continue to draw credit from the big banks.
Leadership needed on skills shortage
The focus on this side of the Nullarbor is still very much on resources projects and the opportunities that flow from them.
The remote location of these projects makes it easy to forget just how large and significant they are to the state’s economy.
However, as discussed in this week’s infrastructure feature, the flow-on is large and diverse.
The construction of mines, ports and railways in the Pilbara is providing work opportunities for many people in Perth and other parts of the state.
It’s not just the people involved in manufacturing and construction, or even related professions like engineering.
Think of the lawyers, accountants, bankers and other professionals that are beneficiaries of this surge in economic activity.
That has a multiplier effect that runs right through the economy, from home builders to retailers of all kinds.
The biggest challenge for WA continues to be finding all the workers – skilled and otherwise – that are needed to sustain the growth.
That’s where the new federal government has a big opportunity to show some creative leadership.