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Leading the charge, again

DESPITE lingering doubts about the durability of the US economic recovery, the outlook for the Australian economy in general, but the WA economy in particular, is exceptionally bright. As is often the case, this State is at the forefront of upswings in business investment, and 2002 is no exception.

Business investment fell precipitously in 1999 and 2000 in WA as the completion of a number of large construction projects coincided with the lagged effects of the recession in Asia in 1998. However, investment has steadily recovered, although it remains well short of the March quarter 1999 historical peak of more than $3 billion in real terms in a single quarter.

Nevertheless, in the absence of a sudden truncation of the global economic recovery, rising business investment will more than offset the impending cyclical downturn in residential construction activity.

The Reserve Bank of Australia has the housing price bubble firmly in its sights in the near-term. House price inflation of 15 per cent nationwide, in the face of underlying inflation of 3 per cent and rising rental vacancy rates, is not sustainable. As is often the case with central banks, the monetary authorities think (and rightly so) it is better to massage an orderly decline in an overpriced asset class than wait until a scorched earth policy is required.

The Australian dollar seems to have found a solid footing at around 55 US cents, 70 yen and 60 euro cents. If it rises by a further 10-15 per cent across the board, and more importantly sustains the higher level, the RBA may be able to take its foot off the brakes by early 2003. At this stage, however, the extent of the currency’s rise is nowhere near enough to prevent further increases in the cash rate in the next few months.

Currency appreciation is a double-edged sword for Australia’s leading exporting State. While a rising value of the $A may limit the extent of looming further increases in short-term interest rates, it directly eats into export revenues and the international competitiveness, both of which are crucial to WA’s economic prospects. It is very unlikely, however, that the $A will rise sharply without an associated increase in the global price of commodities.

As the relatively labour-intensive residential construction industry turns down from around the middle of 2002, the national unemployment rate may struggle to fall further for a while. WA’s jobless rate fell back just as quickly as it had risen in the early months of 2002, as the early stages of the recovery in business investment filtered down throughout the broader economy.

The extent to which the benefits of major resource developments drag other parts of the economy along for the ride will probably always be a contentious issue in WA. However, there is no doubt that WA’s early and vigorous recovery from the recession of the early 1990s was due to much more than the direct effects of the recovery in business investment back then.

Moreover, while WA, and for that matter Australia as a whole, is still exposed to a simultaneous downturn in the prices of all key industrial commodities, the diversification of the State’s resource base since the late 1980s clearly saved the WA economy from deep recession in 1999 and 2000.

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