23/07/2008 - 22:00

Reality check in economic outlook

23/07/2008 - 22:00


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Newspaper headlines have turned increasingly negative this month on Australia's economic outlook.

Newspaper headlines have turned increasingly negative this month on Australia's economic outlook.

They have talked about the "tough times" the economy is going through and the "gloomy outlook".

Federal treasurer Wayne Swan has contributed to this tone by stating that Australia faces "the most difficult global conditions in over 25 years".

Mr Swan was presumably seeking to empathise with "working families" who have been hit by rising interest rates and rising petrol prices.

There is no doubt that some sectors of the economy are doing it tough, and that many households have been squeezed by higher costs.

But let's put some perspective around this.

Mr Swan made his comments after the International Monetary Fund actually increased its economic growth forecasts.

It has lifted its 2008 global growth forecast from 3.7 per cent to 4.1 per cent.

The main driver of growth will be the emerging and developing economies, led by China, which is expected to grow by about 10 per cent in 2008.

In contrast, the US economy, which has been hit by the sub-prime lending crisis and a collapse in the housing market, is expected to grow just 1.7 per cent this year and 0.8 per cent in 2009.

The global outlook is for modest growth compared with the levels that have prevailed in recent years, but only a naive optimist would expect strong growth to continue year-in and year-out.

The IMF describes the global economy as being in "a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere."

But what does this mean for Western Australia?

One contributor to high inflation is the continued strength of commodity prices. The outlook remains positive for commodities like iron ore, oil and gas, which have underpinned the state's buoyant economy.

That, in turn, supports the state's economic prospects, a point reinforced this week by Access Economics.

"The 'bumper bar' of investment projects underway or committed to start soon is a very large one at present, providing good insurance for the Australian economy at a time of heightened economic uncertainty," Access said in its latest Investment Monitor.

"Western Australia and Queensland continue to lead the way with massive investment agendas in resources and associated infrastructure.

"The key concern in those states remains not where the next project is coming from, but rather where are the workers to undertake them."

Access' positive tone echoes the Chamber of Commerce & Industry WA's latest economic forecasts, released early this month.

It is anticipating only a slight slowdown in WA's growth.

A cloud over the state's prospects is the federal government's proposed emissions trading scheme.

Oil and gas companies like Woodside, Chevron, Shell and BP have all highlighted the adverse consequences of the proposed scheme, as outlined in a treasury green paper released last week.

Woodside boss Don Voelte has characteristically been the bluntest, asserting that projects like the Browse LNG project, tipped to cost $20 billion or more, would be unable to proceed.

If Mr Voelte is correct, the ETS would have a profoundly perverse effect.

Carbon intensive (i.e. dirty) industries like coal mining and aluminium smelting would effectively be subsidised by free issues of carbon emissions permits, based on the premise that they would not be able to survive otherwise.

The free issue of carbon permits would serve to muffle the very price signals that are supposed to encourage change towards a 'cleaner' future.

In contrast, a relatively clean industry like LNG production would not qualify for free permits.

This means one of two things. First, LNG projects in other jurisdictions are likely to proceed ahead of the proposed Australian projects like Browse, Ichthys and Gorgon.

Second, it means that coal will continue to be a competitive fuel source for power generation.

Having said that, the green paper is simply designed to provide a basis for discussion. It does not constitute a firm policy position.

The Rudd government has put pragmatism ahead of ideology in most policy areas. Or more precisely, in the handful of policy areas where it has actually moved beyond rhetoric to specifics.

People like Mr Voelte - and Premier Alan Carpenter - need to ensure that Canberra hears these warning

bells loud and clear so that the ETS is changed ahead of its introduction.


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