28/03/2006 - 21:00

WA boom explained in double dutch

28/03/2006 - 21:00

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Australia’s two-speed economy, which has the resource-rich states of Western Australia and Queensland, dramatically outperforming the southern manufacturing states, has just got worse, or better, depending on which side of the border you sit.

The reason, and this takes a bit of explaining, is because we appear to be avoiding an outbreak of Dutch Disease.

Unknown to 99.99 per cent of WA Business News readers, Dutch Disease is not something which attacks elm trees (that’s Dutch elm disease).

Dutch Disease, in its purest form, is a foreign exchange crisis experienced in a country which suddenly discovers a treasure trove of resources – and suffers a soaring currency which destroys its manufacturing sector.

It got its name after the Netherlands discovered natural gas in its part of the North Sea in the 1960s. By the mid-70s, as great wealth was generated by production of gas, the Dutch currency soared in value, killing a wide range of manufacturing industries and prompting the Economist magazine, in 1977, to invent the phrase Dutch Disease.

Australia in 2006 is different for one critical reason – the resources boom is not affecting the entire country, and therefore is not affecting the value of the currency. For WA this is an astonishing situation and goes a long way to explaining why property values are soaring in Perth and not in Sydney, and why mining and oil company shares are soaring at the same time as property.

Quite simply, we are having the best of all worlds and it really has reached the “pinch me, am I alive?” phase of the greatest boom we have ever seen.

What we’re watching is high world mineral and oil prices drive WA’s trade performance through the roof. Last year, WA’s numbers revealed a trade surplus of $28.3 billion – while the rest of the country posted a trade deficit of $17.1 billion.

If WA was an independent country, and if WA had its own currency, the full benefits of the trade surplus, and new investment being attracted by high commodity prices, would be lost. The ‘WA dollar’ would be soaring in value against other currencies, especially the US dollar, slashing mineral sales profits (as reported in ‘WA dollars’) and sharply reducing new project investment.

As you may have noticed there is no ‘WA dollar’. We are still using the South Pacific Peso (also known as the Australian dollar) and it is falling in value because the big manufacturing states of NSW, Victoria and South Australia, are in the doldrums.

There is a number of lessons from this non-outbreak of Dutch Disease. Firstly, it is the single most brilliant reason to get the last of the secessionists to shut up. Being part of Australia, with its low-value dollar, is of immense benefit to WA.

Secondly, there’s no obvious change ahead – and that means the good times just keep on rolling, and the “what if it continues” question raised recently by Briefcase becomes even more pertinent.

What if the boom lasts longer (much longer) than anyone had previously thought possible? Apart from the obvious winners, such as home and share portfolio owners, there are downsides.

First home buyers are being saddled with enormous loads of debt and government services, as mentioned before, are at breaking point now.

But if the dollar remains low and if commodity prices stay high, the outlook for WA is quite remarkable.

There is another downside to all this good news. The boom is creating a classic speculative bubble with hot money from Sydney and Melbourne pouring into the WA property market as everyone else in the country catches on to the fact that we are having our cake (high commodity prices) and eating it (low dollar).

 

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Asset values are not the only area of the economy which is entering unchartered waters. The labour market is also going places it’s never been before.

By the time this edition of WA Business News hits the streets there should be a full scale debate raging about Australia’s new industrial relations laws which make it easier for bosses to fire employees.

That, somewhat obviously, is what the union movement is focussing on – the relative ease with which someone can lose their job, and the potential peril for low wage workers being forced to accept even lower wages.

Briefcase understands the logic behind this campaign but fails to see how it works in an economy where there are already more jobs than workers and where employers are scrambling to find, and keep, skilled staff.

It is possible that a sudden recession will reverse everything good which is happening right now but that’s highly unlikely given the desire of Mrs Wu in Shanghai to get her hands on that new refrigerator she saw last week, the one made with stainless steel from WA iron ore and nickel, copper from Mt Isa, and built in a factory powered by Queensland coal.

The more likely outcome is that the boom rumbles on and this produces a reverse effect of what the unions are predicting – a bit like the way we are benefiting from a non-outbreak of Dutch Disease. High demand for anything (from apples to uranium) produces higher prices. This is a statement to which even Homer Simpson would say: “Doh”.

If you accept that (as Homer does) then you must also accept the reality of high demand for workers producing higher wages for workers.

Sure, there will be hard-done-by stories rolled out in front of the television cameras by Unions WA but the hard facts are that the job market is booming, wages are rising and that produces a situation which the unions refuse to recognise. This is best illustrated with the question: “Why would any employer sack, or take advantage, of his employees when he knows he will struggle to find replacements?”

As Homer would say: “Doh!”

 

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“The public is a ferocious beast: one must either chain it up, or flee from it.” – Voltaire.

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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