Rising local incomes a double-edged sword

Perth’s quest to be considered a serious international city has been boosted by a recent report.

THE boom is dead; long live the boom.

For confused readers, that observation applies to Australia’s resources sector, which is passing through an unpleasant downturn, but which will return, as shown in some eye-catching numbers in forecasts from McKinsey & Company.

If the boffins at the global management consulting firm are right then Perth, and the rest of Western Australia, is on track to blitz other Australian cities in terms of wealth, while also leaving much of the rest of the world in the gutter.

What McKinsey did late last year was analyse 600 cities around the world, calculating where they stood in terms of population in 2007 and wealth creation, measured as gross domestic product per person, and where they will stand in the year 2025.

Perth, for example had a population in 2007 of 1.5 million and a GDP for each resident of $US48,000, with US dollars the common yardstick used by McKinsey. By 2025, thanks to the recovery of the resources boom after Europe’s financial crisis, and a slowdown in China, GDP/head will rise to $US68,000.

Melbourne, traditionally Perth’s principal rival, will rise from a GDP/head of $US38,000 in 2007 to $US54,000 in 2025.

On a percentage basis there is not much difference in the rise of the two cities, but in terms of spending power the people of Perth will be (a) richer by $US14,000 a year, and (b) watching that higher wealth level compound year by year.

Other Australian cities analysed by McKinsey show a similar result to the Perth versus Melbourne comparison. Sydney’s GDP/head is forecast to rise from $US40,000 to $US56,000 by 2025, and Brisbane is tipped to rise from $US38,000 to $US53,000 – meaning that Perth’s $US68,000 makes it a clear winner.

Being richer than any other Australian capital city may provide more than bragging rights for Perth, but not everything will be good news.

On the plus side of the ledger, greater wealth from mining and oil production will enable greater spending on essential infrastructure such as roads and rail services.

On the negative side, the cost of living in Perth will track the GDP increase, so get ready for today’s obscene $50 steak in posh restaurants rising to $80, and the $5 cup of coffee hitting $8, or more.

Envy will also be on the rise, with the eastern states becoming even more jealous as Perth’s prosperity level ratchets up relative to other cities, which will demand higher taxes on WA’s mines, under the guise of spreading the wealth but really as a means of propping up failed industries.

The latest government handout to the vehicle industry is an example of what will become a more common sight as archaic industries and entrenched work practices render more of Australia’s smokestack businesses uncompetitive.

Envy of WA’s success will not be confined to the rest of the country. Perth, by international standards, will be looking pretty good by 2025 – especially when measured against the failing cities of Europe.

Paris, for example, had a GDP/head in 2007 of $US51,000, slightly ahead of Perth. By 2025, according to McKinsey, Paris will rise to $US60,000, and Perth will be comfortably ahead.

It’s a similar story with London, which is expected to rise from $US49,000 to $US62,000, with Perth passing of Britain’s capital bringing almost as much pleasure as passing Melbourne.

But when you dig deeper into the European trend the picture becomes somewhat disturbing. Milan, Italy’s financial capital, will effectively go backwards between 2007 and 2025, with GDP/head creeping up from $US40,000 to $US41,000, and Berlin (which is still carrying the cost of having been half a communist city) rising from $US29,000 to $US32,000 – less than half the GDP/head of Perth.

The king hit, however, is when the Asian numbers are analysed because according to McKinsey China’s capital, Beijing, will rocket up from a GDP/head of $US17,000 in 2007 to $US58,000 in 2025 – richer than most European and Australian cities.

Whether McKinsey’s estimates are correct is not important; time will judge that. What is important is that one of the world’s top consulting firms sees a trend, and that trend is extremely encouraging – once we get past the speed bump known as the year 2012.

Currency capers

ON a much shorter time frame it was interesting to see that one of the financial world’s top investors, Byron Wien, reckons the Australian dollar could continue to rise this year, rather than fall, as is the more popular view.

Wien is a senior managing director of the New York-based Blackstone group and, apart from being an entertaining speaker, is one of the savviest observers of economic events.

His tip about the Australian dollar going up in 2012 was part of his annual 10-point list of possible surprises for the year ahead, and based on a comment that international investors, concerned about rapid money supply growth in the developed world, would “buy the currencies of countries that seem to be managing their economies sensibly”.

As well as Australia, Wien suggested Singapore and South Korea as countries that fit the description of sensible economic management, and possibly heading for currency-value increases relative to the major currencies of the US dollar and the euro.

Flattering as his Australian tip might be, Wien’s view on currency will not be good news for beleaguered manufacturing, tourism, and other non-mining export sectors.

Gem of a tip

AS a final thought on forecasting the future, there was an interesting clash between how the research group IBISWorld sees demand for diamonds and other gems and the performance of the up-market jewellery sector leader, Tiffany.

In the first week of the new year, IBISWorld named diamonds and gemstone mining as being the strongest growth market for 2012.

Five days later, Tiffany reported slowing sales growth in Europe, Asia and the US, cutting its forecasts for the year ahead. Asia-Pacific sales growth dropped from an annualised 36 per cent to 12 per cent. European sales fell by 4 per cent– and Tiffany’s share price dropped by 11 per cent on that news.

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‘‘You can never plan the future by the past.’’

Edmund Burke