SPECIAL REPORT: A hiatus in the US-China trade war and an improved economic outlook gives WA leaders an opportunity to look at longer-term challenges such as climate change and technological disruption.
A hiatus in the US-China trade war and an improved economic outlook gives WA leaders an opportunity to look at longer-term challenges such as climate change and technological disruption.
Last month provided some cause for Western Australians to be optimistic, with the ASX 200 passing 7,000 points and the announcement of a trade deal between the world’s two major economic powers.
However, longer-term challenges such as dealing with technological disruption are firmly in the minds of policy and decision makers.
The gradual recovery of the state’s economy and a reduction in trade tensions between China and the US have eased some big risks for local businesses.
The key measure of WA’s internal economy, state final demand, has plateaued for more than three years at around $50 billion per quarter.
Jobs growth has slowly picked up with about 63,000 more people employed in December 2019 than three years earlier.
“Because of the capacity that was built up at the time, the level of construction and what that created in short-term jobs and opportunities, it took a while to flow through the economy,” Mr Nicolaou said.
“On top of that we’ve had the challenge associated with one of the big global mega trends, technology, and what that’s doing in terms of the workforce and jobs.
“It’s a very real issue in any economy.
“It’s been a jobless-led recovery in the last year or so in many respects, but there’s a solid foundation behind the economy now.”
While executives this time last year had been concerned about the escalating trade war between the US and China, a January truce represents the first step towards a normalisation of relations.
The deal includes a pledge by China to increase purchases of US imports by about $200 billion, which might have a marginal negative impact on WA LNG and agricultural products.
Nevertheless, reduced pressure on China’s economy will be a positive for WA, with the country a key export destination.
JLL research manager WA Ronak Bhimjiani told Business News he was still cautious, however, with the China trade war still a big risk.
“Most of what we export goes to China,” Mr Bhimjiani said.
“One week it seems like they’ve reached a resolution, then the next week there are further tariffs.
“It’s very volatile.
“Nobody wins in a trade war, it’s all losers, it’s just a matter of who loses the most.
“If it’s a full-blown trade war, there will be some huge impacts for WA.”
Mr Nicolaou said while risks had emerged around the world in the past year, he was confident about WA’s relationship with China in the longer term.
“The reality is that China is not just one market, it’s 30 markets, 30 different provinces that are at different stages of development,” he said.
“It’s a centrally planned economy, there are the needs of 1 billion residents, there’s an expectation that demand might shift from one province to another, but the demand will still be there over the long term.
“It would take a catastrophic event for that to change.
“More broadly, the comfort we as a state might get ... the need for the products and services that we offer the global marketplace is going to stay there because of long-term fundamental changes.
“The resources sector, for example, makes long-term investment decisions based on long-term fundamentals, not short-term price spikes.”
University of Western Australia finance lecturer Raymond Da Silva Rosa said mining companies were well positioned to survive any drop in demand, but the impact on the government’s finances would be significant.
“Mining company cost structures have been geared to much lower costs, they benefit from higher prices but it’s not fatal to them if prices fall a lot,” Professor Da Silva Rosa said.
State government revenue drops about $81 million for every $US1 per tonne reduction in the iron ore price, according to May 2019 budget documents.
Professor Da Silva Rosa said that, in some ways, WA had the challenges of prosperity.
One challenge was that the success of the resources industry absorbed labour and capital from other parts of the economy, such as tourism and investment in international education.
“An industry such as the mining sector occupies a lot of the capacity we have, and crowds out other kinds of investment,” Professor Da Silva Rosa said.
“That’s what we saw during the [previous] boom.”
For example, he said the overseas student sector in WA wasn’t as developed as that in South Australia during the resources boom.
“There was a shortage of space, accommodation [in WA], that’s only one instance of it,” he said.
Since the end of the most recent boom, the state government has focused on increasing tourism and education exports, particularly in Asian markets such as China.
The challenge will be to sustain that during another period of capital investment in the resources industry, led by big projects such as Browse and Scarborough.
Erica Smyth, who serves on numerous boards including the International Centre for Radio Astronomy and the Lion’s Eye Institute, said the state was at a crossroads in its adoption of technology.
“We’re at the cusp, we’re going to really embrace the whole digital opportunity or we’re going to just let it happen around us without any active vision of what it could mean for Western Australia,” Ms Smyth told Business News.
“The challenge for us is we’ve got some pockets of really high-grade digital capability in WA: the mining industry, oil and gas, radio astronomy, population health and genetics, and some strength building in cybersecurity.
“They’re all acting a bit in isolated pockets.
“If we don’t become a focal point for innovation in this industry, then most of the development will either stay in-house with the companies that develop it, or be sold to multinationals.”
A big potential problem during that technological uptake would be a skills shortage, she said.
“One of the risks is going to be that we don’t attract enough young people in to learn, and we’re going to be severely skills shortaged,” Ms Smyth said.
“The shortages are all over the world at the moment, so unless we can leverage [that] this is a great place to be, we’ll just be a follower.
“Where else are you likely to run into a geneticist at a barbecue with a mining entrepreneur? The crossover potential is huge.”
Professor Da Silva Rosa also recognised the opportunities ahead, but said the state needed to do a better job of selling itself.
“We have some work to do in conveying to people just how advanced our technology is here,” he said.
Professor Da Silva Rosa said it was often cited that WA had more autonomous vehicles operating than California, particularly given their widespread use on mine sites.
“There could be other spin-offs,” he said.
“If we’ve developed this capability in autonomous vehicles, who knows if that capacity can be easily shifted to robots, thinking about caring for the aged, or taking advantage of automation in other ways.”
ACIL’s Mr Nicolaou said technological progress would create opportunities, but there would be a challenge in adjusting.
Repetitive jobs will be replaced with jobs that can be undertaken using technology, he said.
“The challenge for policymakers, for governments, is to keep up with the pace of technological change,” Mr Nicolaou said.
“[They need to ensure] at a curriculum level, the skills that we’re teaching children in high school, primary school, university, TAFE, are meeting the needs of industry, because it is changing quickly.”
According to job search site Indeed, data science job postings increased fivefold in Australia between 2014 and 2018.
And perhaps to illustrate the scale of competition, 30 per cent of job searches for Australian data scientists were from overseas, compared to about 8 per cent across all jobs, Indeed reported.
BGC chief executive Danny Cooper told Business News the biggest challenge for the construction industry was the low level of population growth and consequent impact on housing starts and values.
“Interstate migration has dropped away, and overseas migration has dropped as well,” Mr Cooper said.
“We see the rise in population well down on what it has been historically; that’s a challenge for us. We haven’t had the housing starts and that’s led to a weakening of our sector.
“What keeps us awake at night is [wondering] when it will change, when will we see population growth?
“There’s growth in the state, but it’s growth in mining areas.”
He said he was concerned the pressure would continue, although there were positive signs, including changes to regional migration rules.
“For anybody involved in residential construction, it’s an extremely challenging time,” Mr Cooper said.
“Businesses are eating into their reserves trying to get through this period, but it's the most protracted downturn we’ve had in residential construction for as long as we can recall.”
To alleviate some of this pressure, Mr Cooper called for fiscal stimulus through infrastructure investment.
The impact of falling housing valuations on homeowners is also significant.
WA had the country’s highest mortgage delinquency rate – where loan repayments are more than 30 days overdue – in the year to May 2019, at 3.4 per cent according to Moody’s.