Maintaining some perspective

10/12/2008 - 22:00

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DURING the past two months there has been an unprecedented wave of bad economic news and plunging business confidence; but just how bad is Western Australia's economic outlook? Many people ask rhetorically why there is so much gloom in the local business

Maintaining some perspective

DURING the past two months there has been an unprecedented wave of bad economic news and plunging business confidence; but just how bad is Western Australia's economic outlook?

Many people ask rhetorically why there is so much gloom in the local business sector at a time when there is still a lot of investment and spending continuing.

It appears that when business executives are put on the spot and are required to make a decision, in the vast majority of cases they err on the side of caution.

The nervous caution that characterises the business sector was highlighted by two surveys released in recent days.

A Chamber of Commerce and Industry WA-Commonwealth Bank survey revealed that 71 per cent of respondents believe conditions in the state economy could deteriorate next year.

This is in stark contrast to the survey findings from six months ago, when 70 per cent of respondents expected the WA economy to remain strong or strengthen in the year ahead.

The National Australia Bank's business conditions index has hit a 10-year low in November.

Similarly its business confidence index has slumped to a fresh record low.

Other data out this month also paints a worrying picture.

Job advertisements on the internet and in newspapers fell for the seventh consecutive month in November to a near two-year low, an ANZ Bank survey found.

Building approvals and motor vehicle sales were among a raft of other economic indicators plunging lower.

The September quarter national accounts data confirmed the anemic state of the Australian economy with quarterly growth of 0.1 per cent.

News on the project front has added to the gloom.

Falling commodity prices have led to the closure of several mid-sized mining operations and industry giant Rio Tinto is reviewing its iron ore expansion plans.

Development projects have also been cancelled.

Fortescue Metals Group, for instance, cancelled construction of a new iron ore railway in the Pilbara even though the contract was 47 per cent complete and there are question marks over other ambitious iron ore projects.

The mining slowdown has washed back onto the oil and gas sector, with Apache Energy suspending its $900 million Reindeer gas project, even though it has already built a 200-person construction camp and awarded contracts to engineers and fabrication companies.

Against this backdrop, where is the case for positive thinking?

For a start, look at the response of the Rudd government in Canberra.

It has quickly put together a $10.4 billion fiscal stimulus package, led by handouts (of dubious merit) to encourage increased consumer spending.

That will be followed by another round of tax cuts next year, which will put more money in householders' pockets.

Other countries are taking similar steps.

China has pledged to introduce its biggest economic stimulus package to sustain businesses activity. Ironically, the ruling Communist Party recognises that a buoyant commercial sector will help to sustain its grip on power.

US president-elect Barack Obama has pledged the biggest public works program since the Great Depression to lift that country out of a protracted economic slowdown.

And on Sunday, India announced an extra $US4 billion in spending to shield the country's economy from the impact of the financial crisis.

Globally there have been big interest rate cuts and moves to guarantee bank deposits.

These may have had a perverse short-term effect, because they seemed to highlight the alarming slowdown.

Nonetheless, in Australia it is inevitable that a three percentage point cut in official rates to 4.25 per cent will help to ease pressure on family budgets and stimulate spending.

Add to that the impact of the sharply low petrol price, which has dropped to near four-year lows of about $1 per litre for unleaded fuel.

In WA, there is still a lot of momentum in the economy from projects that were already under way.

These include Woodside's $12 billion Pluto gas project, Worsley Alumina's $3 billion refinery expansion and the nearly completed Boddington gold mine.

In the Pilbara, BHP Billiton and Rio Tinto are continuing with expansion projects already under way, while BHP has recently committed to its phase 5 growth project at a cost of $7.4 billion.

These projects have contributed to growth in national construction activity, which rose to record highs in the September quarter.

A wide range of economic forecasters agree that Australia will most likely avoid a recession, which places the country ahead of most others.

WA's outlook is even better, with growth of 3-4 per cent widely anticipated in the current financial year.

This is down from the boom, but a long way from a deep recession that many seem to fear. DURING the past two months there has been an unprecedented wave of bad economic news and plunging business confidence; but just how bad is Western Australia's economic outlook?

Many people ask rhetorically why there is so much gloom in the local business sector at a time when there is still a lot of investment and spending continuing.

It appears that when business executives are put on the spot and are required to make a decision, in the vast majority of cases they err on the side of caution.

The nervous caution that characterises the business sector was highlighted by two surveys released in recent days.

A Chamber of Commerce and Industry WA-Commonwealth Bank survey revealed that 71 per cent of respondents believe conditions in the state economy could deteriorate next year.

This is in stark contrast to the survey findings from six months ago, when 70 per cent of respondents expected the WA economy to remain strong or strengthen in the year ahead.

The National Australia Bank's business conditions index has hit a 10-year low in November.

Similarly its business confidence index has slumped to a fresh record low.

Other data out this month also paints a worrying picture.

Job advertisements on the internet and in newspapers fell for the seventh consecutive month in November to a near two-year low, an ANZ Bank survey found.

Building approvals and motor vehicle sales were among a raft of other economic indicators plunging lower.

The September quarter national accounts data confirmed the anemic state of the Australian economy with quarterly growth of 0.1 per cent.

News on the project front has added to the gloom.

Falling commodity prices have led to the closure of several mid-sized mining operations and industry giant Rio Tinto is reviewing its iron ore expansion plans.

Development projects have also been cancelled.

Fortescue Metals Group, for instance, cancelled construction of a new iron ore railway in the Pilbara even though the contract was 47 per cent complete and there are question marks over other ambitious iron ore projects.

The mining slowdown has washed back onto the oil and gas sector, with Apache Energy suspending its $900 million Reindeer gas project, even though it has already built a 200-person construction camp and awarded contracts to engineers and fabrication companies.

Against this backdrop, where is the case for positive thinking?

For a start, look at the response of the Rudd government in Canberra.

It has quickly put together a $10.4 billion fiscal stimulus package, led by handouts (of dubious merit) to encourage increased consumer spending.

That will be followed by another round of tax cuts next year, which will put more money in householders' pockets.

Other countries are taking similar steps.

China has pledged to introduce its biggest economic stimulus package to sustain businesses activity. Ironically, the ruling Communist Party recognises that a buoyant commercial sector will help to sustain its grip on power.

US president-elect Barack Obama has pledged the biggest public works program since the Great Depression to lift that country out of a protracted economic slowdown.

And on Sunday, India announced an extra $US4 billion in spending to shield the country's economy from the impact of the financial crisis.

Globally there have been big interest rate cuts and moves to guarantee bank deposits.

These may have had a perverse short-term effect, because they seemed to highlight the alarming slowdown.

Nonetheless, in Australia it is inevitable that a three percentage point cut in official rates to 4.25 per cent will help to ease pressure on family budgets and stimulate spending.

Add to that the impact of the sharply low petrol price, which has dropped to near four-year lows of about $1 per litre for unleaded fuel.

In WA, there is still a lot of momentum in the economy from projects that were already under way.

These include Woodside's $12 billion Pluto gas project, Worsley Alumina's $3 billion refinery expansion and the nearly completed Boddington gold mine.

In the Pilbara, BHP Billiton and Rio Tinto are continuing with expansion projects already under way, while BHP has recently committed to its phase 5 growth project at a cost of $7.4 billion.

These projects have contributed to growth in national construction activity, which rose to record highs in the September quarter.

A wide range of economic forecasters agree that Australia will most likely avoid a recession, which places the country ahead of most others.

WA's outlook is even better, with growth of 3-4 per cent widely anticipated in the current financial year.

This is down from the boom, but a long way from a deep recession that many seem to fear.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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