10/08/2011 - 10:49

Sound fundamentals can deliver results

10/08/2011 - 10:49


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Plunging financial markets are sure to dent WA’s economic prospects, but the positive factors driving strong growth have not suddenly evaporated.

Sound fundamentals can deliver results

THE past week has been one of those scary periods when rational and sober analysis counted for little.

Deregulated financial markets often have a tendency to experience volatile swings, but rarely do they swing as wildly as they have done during the past week.

We should be thankful for that, because dramatic swings, particularly on the downside, inevitably have a flow-on effect to the real world.

At the very least, the uncertainty engendered by market volatility has an adverse effect on consumer and business confidence.

Volatile markets can also make it harder to lock-in funding, particularly on equity markets, and complicate business planning.

How do you evaluate a business proposal when the Australian dollar, for instance, surges unexpectedly to 110 US cents then tumbles rapidly back towards parity? Where will it be trading next month, let alone next year?

Relative to equity prices and currency values, the outlook for Australian interest rates is easier to manage, but that will be of little consolation.

Markets are divided over the next move in official interest rates, though the events of the past week have made it more likely the Reserve Bank will hold rates steady or possibly cut rates. 

When it evaluates interest rate options, the Reserve’s analysis will be underpinned by its forecasts for the global and Australian economies.

The same should apply when businesses undertake their own planning.

And the consensus is that, while Europe and North America have major economic and financial issues that need to be addressed, the prospects are more positive across Asia and other emerging economies, which have been the key drivers of Western Australia’s strong growth.

The most recent definitive analysis of these matters was provided last Friday by the Reserve Bank.

The news was not glowing, nor was it doom and gloom. The Reserve said the global economy was continuing to expand at rates equal to, or above, the long-run average.

“Growth remains robust through most of Asia, including China, with domestic demand growing strongly and unemployment rates trending lower,” it said.

The central bank acknowledged that global risks to its central economic scenario were “weighted to the downside.” 

“There remains a possibility that the sovereign debt problems in Europe and the US play out in a disorderly and disruptive manner, and that this leads to a marked rise in global risk aversion and uncertainty,” it said.

That is exactly what has happened over the past week. It also acknowledged that most developed countries have limited capacity to respond.

 “While the exposures in the financial system are better understood than they were in 2008, the scope for easing monetary and fiscal policies in most major economies is very limited. 

“In contrast, in many emerging market economies, including those in Asia, the main concern is the increase in inflation and signs of overheating, including in some asset markets. In most of these economies, there has been further tightening of monetary policy.”

To put Australia’s outlook in context, we need to remember that the country’s unemployment rate will remain about 5 per cent, much lower than most other countries and the level that prevailed here through most of the 1980s and 1990s.

Jobs growth will continue to be fuelled by investment in resources projects, driven by demand for iron ore, liquefied natural gas and coal from China and India.

“Mining investment, as a share of GDP, is already at historically high levels and is expected to increase further as large expansions take place in the LNG, iron ore and coal sectors,” the central bank said. 

Unfortunately, the outlook for other sectors, such as retail, tourism and housing construction, continues to be weak.

On balance, there are many positives for WA. Perhaps recent developments will actually deliver a better overall outcome for this state, if they take some of the heat out of commodity markets.

If that leads to a slowdown in project development, that would ameliorate the supply side pressures that are arguably the major issue facing many businesses in the state.

We don’t want a boom or a bust, we want sustained strong growth; and that looks achievable.


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