04/10/2005 - 22:00

Growth cycle pushes prices higher

04/10/2005 - 22:00

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The housing and resources booms in Western Australia’s so-called ‘V8 economy’ have been credited with the state’s above-average performance, but higher prices are creeping into the picture as the cycle is prolonged.

Growth cycle pushes prices higher

THE housing and resources booms in Western Australia’s so-called ‘V8 economy’ have been credited with the state’s above-average performance, but higher prices are creeping into the picture as the cycle is prolonged.

A state final demand (SFD) mid-financial year forecast from the WA Department of Treasury and Finance of 5 per cent this year was exceeded by 0.5 per cent, according to the latest Australian Bureau of Statistics figures.

Despite traditionally volatile quarterly movements in the SFD figure (the total measure of state output), half and full-year aggregates are considered by economists a useful measure of state economic growth.

In the half-year to June, WA recorded by far the strongest SFD growth of all states at 2.9 per cent – the next best being New South Wales, Victoria and South Australia, all at 1.5 per cent.

To put this in context, seasonally adjusted SFD growth peaked at over 10 per cent in June 2003 and just less than 14 per cent in June 1997.

The largest element of this growth, household consumption, which contributed 2.7 percentage points to annual SFD growth, grew by 5.1 per cent over the year to June. This was achieved at a time when the rest of the nation was experiencing a drop-off in the measure, with the national growth figure at just 3 per cent.

The rising oil price has been touted as one possible reason for the lack of household spending, as it feeds into higher prices first for producers, and then consumers.

According to the Reserve Bank, the higher oil price during the June quarter (see Resources, pp20-21) dominated changes in producer prices, accounting for roughly half of the quarterly price increase at each stage of production.

The prices of iron and steel, major inputs for the large construction and resources sectors, have continued to rise strongly at 12.4 per cent for the year to June.

While the nation’s capital cities enjoyed steady inflation at a collective average of 2.5 per cent in the year to the June quarter, prices in Perth grew by 3.8 per cent over the period, according to the ABS consumer price index.

Similar to the national picture, the rising cost of fuel had an effect on Perth’s inflation rate, but increases in housing costs were also significant – rising by 2.1 per cent during the quarter and by 8.5 per cent through the year to June 2005. In comparison, housing costs across Australia rose by 3.9 per cent through the year to June.

Despite these higher rates, the state’s housing sector continues to show good growth, with dwelling investment rising by 12 per cent during the year to June. Building approval numbers from the months following June suggest this will continue.

Public investment, another large contributor to growth in WA, rose 30 per cent during the June quarter, according to the ABS.

The cost of the State Government’s capital works program during the year ended up $219 million more than anticipated in the budget.

The value of WA’s exports rose by 3.3 per cent in the June quarter and by 10 per cent over the year to June, although this rise was offset against stronger growth in imports of 13.6 per cent during the quarter and 26.4 per cent over the year.

A significant portion of these imports is likely to have come from higher Australian dollar, investment in the resources sector and strong consumer confidence levels.

While trade did not make a significant contribution to economic growth over the past year, the Chamber of Commerce and Industry WA is forecasting exports to be boosted in 2005-06 by record commodity prices and increased production levels in the resources sector.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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