Powerhouse will need to diversify

Western Australia’s economic expansion over the past four years has made it the economic powerhouse of the nation. By and large, these good times have been the result of a dominant resources industry, which has been increasing production and investing in new capacity in order to meet strong global demand for its key commodities – particularly from China.

Looking forward over the next five years, it is likely that the state will continue to leverage on its comparative advantage in resource extraction and processing, which should bring with it further economic growth and development. Increased diversification within the sector has also encouraged the exploration and mining of a broader range of commodity resources and opened new export markets – helping insulate the economy from fluctuations in demand for key commodities.

Today, the mining sector accounts for nearly one-fifth of state output and has also contributed to the growth of other sectors, in particular the construction sector (through business investment and construction engineering) and the manufacturing sector (through down-stream processing of mineral and energy resources).

There also exists a growing number of small- and medium-sized businesses that service WA’s resources sector in the areas of engineering and design, geophysics, fabrication and construction, training, electrical engineering, process engineering, asset management and development.

However, WA is more than just mining.

The services sector continues to expand rapidly, with growth in the finance and insurance and property and business services sectors particularly strong. Today, the services sector accounts for almost 40 per cent of total output and employs over half of the state’s workforce.

The construction industry has also grown rapidly, reflecting both the booming housing market and the large scale building and engineering construction projects being undertaken in the mining and resources industry.

The strength of the WA economy has also meant that it is an increasingly desirable place to live. The state’s population growth is second only to Queensland’s, with more people migrating from other states and from overseas to take advantage of the employment opportunities that exist, as well as its more affordable housing market.

High levels of population growth will not only boost the supply of labour that supports the economy, but have numerous spin-off effects through the increased demand for housing and other services.

By virtue of its geographic location, it is likely that WA will be able to further develop its relationship with, and take advantage of, the growing opportunities that exist in the rapidly growing Asian economies. Importantly, opportunities are likely to emerge beyond the traditional resources industry and to services industries such as education and training, professional services and tourism.

Overall, it is likely that the resources sector will continue to dominate WA’s economic growth profile over the next few years, boosted by continued strong global demand for resource commodities from its increasing number of export markets. Some export markets will be likely to grow in importance over this period (such as India), while China is likely to become the state’s major export destination, as its remarkable growth record continues, particularly in the lead-up to the 2008 Olympics.

This demand will encourage further investment in the resources sector and the economy more generally, with more than $100 billion worth of investment projects either under construction or being considered.

While this should ensure that WA continues to grow at a robust pace over the next five years, continued diversification will mean that it is better placed to respond to, and accommodate, future challenges as they arise.

• John Nicolaou is acting chief economist at CCI WA.