WA back at the head of the pack

AFTER regularly outperforming the national average over the early 1990s, the Western Australian economy had lost a little of its shine until 2001-02, when it regained its title as the fastest growing State economy.  The State now seems well placed to reap the benefits of the expected strengthening in the global economy later this year.

WA is blessed with an abundance of natural resources. Mining and agriculture comprise around 25 per cent of the State’s economy, compared with 10 per cent for the national average.

The export-oriented nature of these industries does expose the State to the vagarities of external economic conditions, however, and as a result WA has tended to suffer more than other States during periods of global economic weak-ness. 

Therefore, economic growth of 5.7 per cent achieved over 2001-02 against major trading partner growth of around 2 per cent was a remarkable performance and itself is a vote of confidence in the WA economy, given that growth was driven in a large part by business investment.

Business investment is expected to remain the main driver of economic growth in WA over 2002-03 and 2003-04, reflecting the large number of resource-related projects currently under way or soon to be commenced. However, a key risk is if the high levels of uncertainty currently permeating the global economy affect investment decisions in the State. 

The long lead times involved in many of these projects suggest that, on the whole, they are unlikely to be affected by such uncertainty. More important are likely to be State-specific issues and to that end the Native Title agreement recently settled on the Burrup Peninsula will help to improve investor confidence in the region. 

While the availability of skilled labour is always an issue for potential investors, WA has the highest proportion of people with a post secondary school qualification of all the States.  Furthermore, the State has a higher than average proportion of students studying engineering and related technologies at present, suggesting a rising pool of workers well-qualified to meet the State’s needs.  Nevertheless, labour productivity growth remains an issue, with WA having lagged the national average for a number of years.

While Australia is set for a significant downturn in housing construction activity over 2003-04, WA is likely to suffer a much more modest downturn. WA has not seen the same extent of over-building that has affected the east coast housing markets and hence construction activity and prices are likely to remain relatively more solid. 

Furthermore, the high proportion of WA’s population in key household formation age groups augurs well for medium-term demand for housing. One development that may dampen housing demand is negative net interstate migration of recent years, which reversed the trend of much of the 1990s.  Sustained, strong employment growth and relatively affordable housing will assist in re-establishing the positive trend and should help to outweigh any perceived disadvantages of WA’s isolation.

Although household spending is a smaller part of the WA economy than the Australian average (50

per cent versus 60 per cent), it nevertheless has been important in underpinning economic growth over the past 18 months. The funda-mentals supporting household spending – namely disposable in-come and household wealth – should remain relatively positive, although Western Australians have not seen the same gains in house prices, and therefore household wealth, as the eastern States.

Exports are likely to remain the soft spot in the WA economy for much of this year. This in part reflects the impact of the drought, with WA, the country’s largest wheat producer, particularly hard hit by the sharp fall in crop production in 2002. 

Export growth will also be con-strained in the near-term by weakness in some of the State’s trading partners, including Japan. Exceptions are China and South Korea – WA’s second and third largest export markets – which have remained relatively resilient during this period of weak global economic growth.  An improvement in exports is in prospect for the second half of 2003, as the global economy strengthens. 

In summary, the WA economy should continue to reap the benefits of a resources-led boom in business investment.

Economic growth of around 4 per cent is expected over 2002-03, while stronger growth in exports should help to underpin a slightly faster pace of growth in 2003-04.

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