The boom is back with all the same issues as before, and a few new challenges thrown in.
Ties to China give economists pause for thought as US stalls
The boom is back with all the same issues as before, and a few new challenges thrown in.
AS the Australian dollar reached parity with the US currency last week, local analysts seemed unconcerned by this change in fortunes, which was hitting the headlines as a nasty downside to our robust economy.
The high currency would once have caused consternation, yet today it is merely a by-product of the success of the resources sector.
No matter how much drought-affected Western Australian grain farmers might bleat about the dollar’s rise, or tourism players feel the pain of Australia’s currency strength, the impact on minerals and oil and gas appears negligible as commodity price rises more than cover exchange price losses.
In WA, it seems, the problem can be shrugged off as the near fully employed enjoy cheap breaks in Bali.
But while the Australian dollar’s rise heralds the boom Mark II, there is a much different feeling from economists this time around.
Yes, all the same problems are arising again. Economists are warning of skills shortages and high property prices. They highlight the reliance on China as the key driver of the demand in commodities that is long term and want to see us diversify our economy. The two-speed economy looms large again.
But while the boom might generate the same underlying issues, there are distinct differences.
The looming skills shortage comes at a time of big cutbacks in immigration, in part as a political response to the rise in refugees and the call for a big Australia that preceded the recent federal election. Between 2005 and 2007, WA couldn’t get enough people in a time of high immigration; it is only likely to be worse this time around. The issue is highlighted by several economists in our survey on pages 18-20.
In the last boom, the whole world was purring like a high-performance vehicle. China’s growth was, to a large extent, fuelled by its exports to the wealthy nations of the world.
This time around the GFC has left long-term legacies. Europe is staggering under poorly managed debt, the confidence of the US has been dented, and once-burgeoning emerging markets like the Middle East have slumped. It is still ‘Asia’s century’, though.
The funding equation, too, has altered, with debt much harder to come by and costlier when it does.
This time, almost alone, and driven more by internal demand, China is stoking WA’s economy. That makes it a much riskier reliance in the short term even though it is part of a longer-term trend of big growth across the region, which is why economists call this the ‘Asian century’.
And, finally, the two-speed economy is no longer a surprise. Politicians have had five years to think of ways to deal with it. Special resources taxes are, in part, designed to slow the rapid growth and redistribute wealth from the sector to less competitive industries and regions of Australia.
Boom Mk II
Although Premier Colin Barnett refuses to talk of a boom, everyone else is.
It is clear, too, that those conditions have been present for at least six months. The state government’s May budget described the circumstances that are in place today, notwithstanding the lull in activity caused by the unexpected federal plan to tax the resources sector, in the following way.
“The Western Australian economy appears to have turned the corner following the impact of the global financial crisis in 2008-09,” Treasury said in the budget papers.
“Nonetheless, recovery in the global economy remains fragile.
“For Western Australia, a sustained global recovery is critical to maintaining demand for exports and providing a suitable environment for business investment.”
Given that global conditions remain much the same now as in May – Europe’s debt crisis and faltering growth in the US – there is little suggestion that the key budget numbers have changed significantly.
Growth was then expected to accelerate from 3.75 per cent in 2009-10 to 4.5 per cent in 2010-11 and 4.75 per cent in 2011-12, slightly above the long-run average.
This pick-up in growth will be underpinned by a ramping up of construction on the $43 billion Gorgon LNG project – the largest investment in a resources project in Australia’s history.
As the economic recovery gains traction, employment is forecast to grow by 1.75 per cent in 2010-11. The unemployment rate is expected to gradually fall to 4.5 per cent by 2013-14.
At a Conneq event last week, BIS Shrapnel senior economist Adrian Hart drilled down into the resources-related industries that benefit from both recent production capacity increases and anticipation of another phase of investment growth, not to mention the benefits that last beyond construction.
For example, iron ore production is set to increase from the current level of about 400 million tonnes per annum to reach 580mtpa 2015 as capital investment increases from around $6 billion per year currently to between $9 billion and $10 billion by 2012-13.
Oil and gas development will jump from $9bn per annum to $12 billion to $13 billion/year in 2014-15.
As a result of this growth, BIS Shrapnel estimates that resources sector maintenance work will rise by one third from $4.5 billion a year currently to around $6 billion a year in 2014-15. That is a big increase in the steady underlying work and ought to be reflected in other spin-off opportunities around the sector.
However, Mr Hart thinks the federal government’s forecasts of strong mining investment increases this financial year are premature.
“I stress that the major part of the cycle is a bit longer term than industry expectations,” he said.
“But overall we’ll see much stronger levels of production and exports over the next five years as all the investment that is taking place right through the latter part of the 2000s and this decade start to have an impact on the ground.”
Business confidence surveys certainly suggest this could be the case.
There are plenty of jitters out there as local economists observe how much more dependent on the fortunes of China we are now than last time around.
Europe is ailing and the US can’t seem to restart its economy, leading to a currency devaluation that is hurting WA’s exporters, especially those that aren’t benefitting from the big commodity price rises. A looming trade war between China and the US is another issue of concern to business.
There are also lingering problems from the GFC, especially around the availability of funding for growth. While resource projects have access to Chinese capital, other businesses are struggling to find money to fund their growth.
Banks say they are open for business but there is plenty of evidence that their lending policies are much tighter and costlier than just two years ago.
As such, businesses have to constrain their plans and find other ways to fund themselves, including through managing their own trade creditors.
Dun & Bradstreet this week revealed that Australian firms’ payment terms have blown out to more than 53 days, although WA businesses were the quickest at just over 51 days.
In its September quarter Outlook to be released this week, the Chamber of Commerce and Industry WA underscores the high level of business investment expected to take place in WA.
About $220 billion in projects have been identified for the state by Access Economics, almost as much as the rest of the nation combined.
The steep rise comes as the state still reaps the benefits of stimulus spending which, according to CCI, has been a significant reason for its increased forecast of 4.5 per cent for WA’s economic growth this financial year.
Stimulus spending has been significant in areas such as education and specific infrastructure projects such as the Ord River Scheme expansion.
Despite this spending, business investment is racing ahead of the state’s ability to keep up.
Not only are we short-staffed (see accompanying article) but we are failing to keep up on numerous fronts.
When the Barnett government came to power it stopped projects like the proposed sports stadium and new museum; but it is not just high-profile projects like this that are needed to maintain the lifestyle to which we have become accustomed.
RAC chief Terry Agnew warns of a significant underinvestment in our roads, which will only be exacerbated by rising investment and increased population.
Mr Agnew told a recent Committee for Economic Development of Australia audience that the RAC had identified $2 billion in high-priority road projects during the recent federal election campaign.
He said the state’s auditor-general had found an $800 million shortfall in road funding, while the WA Local Government Association suggested $1.4 billion was needed to fix existing roads.
Mr Agnew said WA now had the worst road safety record in the nation, a complete reverse of the situation 20 years ago and a problem that will only get worse if underspending continued.
“Our country road death rate is comparable with third world nations such as Thailand and Uganda,” he said.
He said many of the regional road issues lay in the network that serviced the booming mining areas and linked them to Perth and, in turn, WA to the eastern states.
“If we want to grow the state and grow the economy and we want to grow the population we have to maintain and grow our road network,” Mr Agnew said.