Positioning business to reap the rewards of emerging growth opportunities

What are the key issues for the WA economy over the next 12 months?

John Nicolaou: Signs are emerging that the worst may be over and the New Year will bring a return to growth and prosperity in Western Australia. This new phase of economic growth and development will also bring with it a number of challenges for the local economy and business. There is growing concern in the WA business community that the severe labour shortages that plagued the state in recent years are likely to return. Already, many companies, especially those in the aged care, retail, hospitality and community services sectors, are finding it more difficult to attract and retain workers. A growing economy will also require additional investment in nation building, wealth-creating infrastructure to help encourage business growth and attract new projects to the state. High-quality economic infrastructure, appropriately placed suitable land, and efficient planning processes are central for industry growth and the attraction of business investment to the state.

Gavan Forster: The main issues facing the WA economy in the next 12 months revolve around ensuring that there are ‘supply side’ improvements to enable industry to cope better with the next upturn in demand. While there has been a recent improvement in business sentiment due to anticipated future resource development, commercial building activity looks set for a quieter period as major projects in this sector approach completion, and there are few in the pipeline to maintain activity levels. Financial constraints imposed by banks add to the likely brake in activity in this sector.

Ian Satchwell: The key short-term issues for the WA economy principally involve actions to manage growth in the medium term, including workforce planning, infrastructure and services as well as government efficiency and effectiveness. The construction boom that is about to take place will dwarf the last boom and will last for most of the next decade. It will create a large, permanent expansion of the WA economy. Developing a workforce to resource the boom is the key issue for WA. Training alone is not sufficient.

Alan Langford: The state’s capital intensive economy has been much less adversely affected than could have been the case in the immediate aftermath of the collapse of Lehman Brothers in the middle of September last year. The ‘normalisation’ of capital markets is largely due to a raft of support measures put in place by central banks and the broader arms of governments the world over. This support framework must eventually be dismantled but nobody can be sure of when capital markets will be able to stand on their own without falling over or what will happen when the support is withdrawn. So a lasting recovery in capital markets and the broader economy is not yet assured. The most immediate threat to the WA economy, however, is if the Australian dollar remained expensive for a prolonged period.

What should the state government be prioritising in terms of economic management?

John Nicolaou: With government spending continuing to grow at unsustainable levels in recent years, it is imperative that the state delivers on its promises to create a more efficient and streamlined public service. The government must implement the findings of the soon-to-be released economic audit group to deliver the reforms that are urgently needed to curb spending growth, and improve the efficiency and delivery of services from the public service. A more efficient public sector will also provide the opportunity for the government to deliver a more competitive tax system, and shake the state’s unwelcome tag as the highest taxing jurisdiction in Australia. Getting the tax structure right is the single most constructive reform that governments can do to promote a productive economy and competitive business sector. While temporary payroll tax relief for a large number of small businesses was provided last year, permanent changes to improve competitiveness remain a priority.

Gavan Forster: These supply side issues require government action to reform the planning approval process to ensure more efficient delivery of new land and infrastructure. The state also needs to ensure the continued supply of land and skilled labour in sufficient numbers to cope with anticipated demand for housing.

Ian Satchwell: A key priority for the state is to develop a comprehensive workforce and population strategy. The government must also develop greater effectiveness and efficiency of the bureaucracy. All kinds of infrastructure and services are also needed: industrial infrastructure such as ports and industrial precincts; community infrastructure, including housing and facilities for education and health; and government services to meet the needs of development and population growth. The most pressing social issue – but an economic one as well – is the still-widening gap between the status of indigenous and non-indigenous Western Australians. The social conditions in a number of towns are arguably the worst in Australia and are worse than in many impoverished third world countries. From an economic perspective, the opportunity costs in terms of lost productivity are very high. Starting to close this gap must be a top priority for government.

Alan Langford: The state must ensure that the benefits of any significant LNG construction phase are shared to create a lasting legacy for the state to fall back on when resource booms are less frequent or vigorous as this is expected to be. We need to be putting a meaningful proportion of the wealth generated from it towards a down payment on a lasting legacy, especially including renewable energy, protection of WA’s unique environment and pre-eminent education and healthcare facilities. All of those lofty goals inevitably cut across both state and federal government responsibilities, hence the crucial role of progressing commonwealth/state relations.

How do present circumstances create economic opportunities?

John Nicolaou: In a testament to the strength of the local economy, and the ability of local industry to adapt to testing times, WA businesses are among the best placed in the world to emerge from the downturn in a position of strength, and ready to pounce on opportunities that arise. Our close geographic and trade links with China, India and developing Asia place the state in good stead for the future. A return to strong growth in these international economies will continue to fuel demand for local products and services. This in turn will create many opportunities for local businesses.

Gavan Forster: Building companies are using this period to rationalise and diversify their operations, either by scaling down their activities and/or seeking new opportunities in other sectors. For example, commercial builders are looking at housing market opportunities or other geographical areas.

Alan Langford: In a carbon-constrained world, it is inconceivable that WA’s generally sunny and windy climate cannot be harnessed, including especially in geographic locations close to existing and prospective high energy intensity industrial sites, to generate supplementary energy supplies that do not require emissions permits. Only the most diehard climate change sceptic would not see renewable energy as a potential comparative advantage of the WA economy in the future – not in the short term, but on a modest scale in the medium-term (two to five years) and on an economically significant scale in the longer term.

What are the economic drivers for businesses that are not directly connected to the resources sector?

John Nicolaou: The growth in the local resources sector, along with the state’s impressive population growth over recent years, has helped businesses in a wide range of sectors, including retail, hospitality and residential construction. While the local resources sector continues to grow, and requires more workers, businesses not directly linked with the mining industry will continue to benefit from the greater demand for their products and services.

Gavan Forster: The main economic drivers for the building industry include interest rates, immigration and population growth, consumer and investor confidence and our terms of trade (including the health of the agricultural industry, not just resources). Public sector spending is also particularly important at this time. The most volatile elements are ‘investment expenditure’ (housing) and the construction of multi-unit residential development. Changes in each of these areas can make the difference between a “normal” year and a “boom” year.

Ian Satchwell: Outside resources the main economic drivers for WA businesses are population growth and demand for services. For mining and petroleum services, which are connected to the WA resources sector, there are great opportunities for export. WA will experience sustained high growth, with its population reaching around 2.55 million by 2016. Many of the additional people that WA needs will come from other countries. This growth provides great opportunities for business of all kinds.

Looking at our key markets where do you see the opportunities and threats?

John Nicolaou: Our major trading partners to the north, including China, India, and developing Asia, are undergoing a remarkable demographic transition, which has resulted in a large number of people moving from agricultural areas to cities in pursuit of more modern lifestyles and better job opportunities. This urbanisation has required massive investment in infrastructure to accommodate this growing population. Such growth requires significant amounts of energy, resources and expertise that WA, as the nearest major trading partner to many of these countries, is ideally placed to provide. This in turn is likely to generate new investment and job opportunities in WA, and help lock-in future growth and prosperity for the state. During last year’s state election campaign, CCI outlined the key policy issues that need to be addressed for WA to reach its full growth potential. If these policy issues are not addressed, they will pose a considerable threat to WA’s prospects as a desirable place to invest and do business. The 10 key policy areas include, addressing labour shortages, tax competitiveness, public sector reform, regulation and red tape, and education and training.

Gavan Forster: The nature of activity in the building industry is regularly recurring cycles of boom/bust. While the causes of the volatility change with each cycle, the fundamental issue at this time is supply side efficiency to reduce the potential for bottlenecks during the next upturn.

Ian Satchwell: The countries that are most important to Australia are also the most important to WA. These are (in no particular order) Japan, China, India, the US and Indonesia. European countries are also important markets. Opportunities include: broadening our trade base with China beyond minerals and energy products to include manufactures, agricultural and food products, technology and services; growing a broad-based trade and foreign investment relationship with India; increasing our exports of knowledge-intensive services, as well as replacing services imports with domestic services; and building our economic links with Indonesia, which is the world’s fourth most populous nation and WA’s nearest neighbour.

Alan Langford: Unless the cost of capital rises sharply as and when the global inflation sleeping giant awakes from its slumber, resource-based development in general will be the most powerful engine of growth in the WA economy for the foreseeable future, but not indefinitely, because LNG processing is at best a bridge to a carbon constrained global economy – one that will transport a lot of vehicles for quite a few years, but a single lane bailey bridge nevertheless. The most obvious historical parallel with the likely impending LNG boom is the development of the iron ore mines in the Pilbara in the 1960s, but that watershed phase in the state’s economic development did not have to grapple with anything like the climate change mitigation mechanisms that must be taken into account nearly 50 years later. To capitalise on this, the state government actively work with Canberra to overcome the politics surrounding this area.