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Investment the key to sustained growth

WA’s economy has performed well over the past year, although just how well is still not entirely clear.

CCI forecasts the State’s economy will grow by 5.75 per cent in 2001-02, while Treasury’s forecast, published in the recent WA Budget papers, is a more modest 4.5 per cent.

Either growth rate represents a fairly impressive record for Australia’s most export-reliant State in the face of a global economic slowdown, which forced many of our key trading partners into recession.

Robust domestic economic activity has so far allowed the State’s economy to grow strongly despite a diminishing contribution from exports.

The key questions for 2002-03 are whether that strong domestic momen-tum will be sustained, and whether the international sector will resume its usual positive contribution to WA’s growth.

Some of the recent drivers of growth are likely to weaken or reverse over 2002-03.

Residential building was a significant contributor to growth in the past year, as the industry’s normal boom-bust cycle was magnified by the Govern-ment’s temporary doubling of the $7,000 grant for first time buyers of new homes.

As the cyclical and policy-induced components of this boom both start to fade over the coming months, residential building will probably contract.

With interest rates now rising and the housing boom tapering out, consumer spending growth is also likely to moderate over 2002-03.

Both State and Federal governments plan to rein in expenditure growth and restore structural budget surpluses. So it is unlikely that public spending will contribute much to GSP growth in 2002-03 as in recent years – at least, if spending is kept within budget.

With housing, private consumption and government spending all easing, the key to the sustainability of WA’s strong economic growth in 2002-03 will be business investment.

Business investment has been the largest single contributor to the recovery in WA’s economic growth in 2001-02 from the contraction of

2000-01.

The volume of investment in the 2001 calendar year was about 21 per cent higher than in 2000.

This growth was spearheaded by the North-West Shelf project, but included a range of smaller resource-related investments, including West Angelas iron ore and the Emily Ann nickel project. In addition, there have been many investment projects outside the resources sector, in government and its agencies or private commercial construction.

The outlook for 2002-03 is positive, with a range of investments confirmed or likely to proceed, including BHP-Billiton’s Mining Area C iron ore project. But while activity levels will be even higher than 2001-02, the rate of increase is likely to be slower, so the contribution of business investment to overall eco-nomic growth will also diminish.

Net exports are perhaps the most uncertain prospect for 2002-03.

In volume terms, WA’s exports have trended down in line with the economic fortunes of our major trading partners, although until recently the weak Australian dollar and higher commodity prices helped to cushion the effect of weak export volumes on exporters’ revenues.

While global output and trade are likely to recover in 2002-03, most forecasters expect the recovery to be gradual. We may have to wait until 2003-04 before net trade once again makes a significant contribution to WA’s economic growth.

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