14/08/2007 - 22:00

Focus on the real economy

14/08/2007 - 22:00


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The past week has seen a flood of commentary and analysis focusing on the instability in global financial markets and trends in interest rates, with comparatively little attention paid to developments in the real economy.

The past week has seen a flood of commentary and analysis focusing on the instability in global financial markets and trends in interest rates, with comparatively little attention paid to developments in the real economy.

Business owners and managers in Western Australia need to be conscious of what is happening in financial markets, but the main game is still in the real economy.

Take the Reserve Bank’s statement on monetary policy, issued earlier this week.

The Reserve Bank said it expected inflationary pressures to be a little higher than it had previously anticipated, which added to the prospect of another lift in interest rates later this year.

That is obviously bad news for households and businesses carrying large amounts of debt – and good news for the many retirees and other people who have paid off their home and are net investors.

But ask the question: why have inflationary pressures increased?

Fundamentally, it’s because the outlook for economic growth remains very strong.

“Current expectations of official and private sector observers are that the world economy will continue to grow at an above-average pace in both 2007 and 2008,” the Reserve Bank said.

It added that growth expect-ations had generally been revised upwards over recent months, with slower growth in the United States expected to be more than offset by stronger growth in China and the other major economies.

The strength of the world economy is continuing to support commodity prices, which in most cases have either remained high or even strengthened further.

The plunge in nickel prices over the past few months is a notable exception to the pattern, but observers who take a long view will recognise that historically nickel prices remain high.

The Reserve noted that forecasts for Australia’s bulk commodity exports like iron ore have generally been revised upward, reflecting further increases in expected demand from China.

The positive economic outlook indicates that WA will continue to provide abundant commercial opportunities.


Project spending keeps on growing

Access Economics’ latest Investment Monitor provides an antidote to pessimists who fret over the fall-out from the instability in financial markets.

The value of major capital investment projects under construction in Australia has increased to a record $141 billion, up 29 per cent over the past year.

The value of WA projects increased by 41 per cent and accounted for an extraordinary 23 per cent of the national total.

Those figures do not include Woodside Petroleum’s $10 billion Pluto gas project, which recently gained board approval. 10 billion is a number that rolls off the tongue easily but I suspect many people do not appreciate just how big the Pluto project is.

It is the single largest private sector investment decision ever taken in Australia, and about half the total spending will be in Australia. It would be nice if Woodside could lift the Australian content above 50 per cent, but it still represents a huge boost to commercial activity.

With no end in sight to the rapid expansion of the iron ore industry – and with a range of projects in sectors like nickel, molybdenum and gold underway or set to proceed – business investment shows no sign of slowing.


Infrastructure needs to keep up

Supply side constraints provide some of the biggest challenges facing industry in WA.

Economic infrastructure, like ports and railways, is struggling to cope with the increased demand.

Social infrastructure, like housing, is also a big problem, especially in the state’s north.

Hence it is encouraging to see some of the big mining companies, like BHP Billiton and Fortescue Metals Group, make a serious commitment to provide extra housing.

Their decision to invest hundreds of millions of dollars in extra housing in the Pilbara signals their faith in their durability of the boom, and provides a welcome change from the industry’s reliance on fly-in fly-out operations.


Dealing with the skills shortage

Buried in the Reserve Bank’s monetary policy statement were some fascinating statistics on Australia’s response to the skills shortage.

The number of apprentices working in the construction industry has almost doubled since 2002, accounting for more than half the total rise in apprentice numbers.

The number of construction workers aged 15-24 years has increased by 10 per cent a year since 2002-03.

Older workers are staying in the industry longer, with the number of employees aged 55 years and over increasing by 12 per cent a year since 2002-03.

These numbers highlight the adaptability of industry and workers. They have responded to market opportunities and signal the benefits that flow from a flexible, lightly regulated labour market.


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