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Global volatility concerns for WA

WHILE the medium-term outlook for the Western Australian economy has strengthened following the announcement of the $25 billion deal to supply LNG to China, the near-term could prove to be more testing. In particular, the impact of the recent volatility iin global equity markets on Australia is still highly uncertain and could have implications for business and consumer spending in WA.

Nevertheless, recent data suggests that WA is well placed to meet these challenges. Household spending has remained strong this year, with real retail sales up by 9.6 per cent over the year to the June quarter, the strongest since September 1993. Activity in the housing market also remains firm. While forward indicators of activity, such as building approvals and housing finance commitments, appear to have peaked, both remain at high levels.

House prices in Perth have also continued to grow strongly, rising by 9.4 per cent over the year to the March quarter – the strongest in 12 years. As with most other capital cities, this strength seems to be at odds with rising vacancy rates and softer rental yields. Furthermore, with a considerable amount of new supply still to come on stream, these imbalances suggests that there is some risk of a correction in the Perth housing market, although to a lesser extent than other capital cities.

One of the main drivers of growth in the Western Australian economy over 2002-03 is expected to be business investment, with the fundamentals and forward indicators remaining supportive of this. Notwithstanding some recent softness, surveyed profitability and business confidence remain at high levels and investment intentions have strengthened.

The value of private non-residential construction work in the pipeline is now at similar levels to 1997-98 – a year where business investment rose by around 50 per cent and the economy grew by close to 6 per cent. Much of this is due to the commencement of a number of large mining and metals processing projects over the past year, with the pipeline of work expected to rise further with several more large projects scheduled to start soon.

In contrast, the pipeline of private non-residential building work, such as offices, shops, hotels and factories, has eased back as progress has been made on a number of large projects, such as the new Woodside headquarters.

And there has not been (nor is there expected to be soon) any major new projects to replace them.

The possibility of extended weakness in the world economy is of particular concern to the Western Australian economy, given the importance of exports to this State, but also given the link to business confidence and investment. However there has been a number of recent developments that may help to cushion activity in WA.

Firstly, the global share market volatility has led to a depreciation in the Australian dollar recently, which, if sustained, could help to support returns to exporters. Also, the Reserve Bank of Australia has signalled that, while interest rates are headed higher, they are unlikely to be increased until the world economic outlook improves. Finally, the huge amount of construction work in the pipeline and related multiplier effects should help to support growth in WA. Overall, economic growth of 4.25 per cent is certainly achievable over 2002-03.

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