Export growth strongly expected to drive economy of WA in 2007

In its WA Economic Compass report, CCI estimates that the state economy will record 6½ per cent growth in the current financial year and a further 5¼ per cent growth in 2007-08.

CCI chief economist John Nicolaou said the continuing positive outlook for the economy was underpinned by higher exports, based on the record amounts invested in building capacity in the resources sector in recent years.

Export earnings in WA are forecast to rise by 14 per cent in 2006-07, and by a further 9½ per cent in 2007-08.

Activity in the domestic economy is expected to ease this year and in 2007-08 as a result of a moderation in business investment growth after several years of large scale capital expansion.

Nicolaou said the domestic economy was unlikely to repeat the rates of growth recorded over the past five years, but growth was still expected to remain strong and to support broader activity.

"Despite higher interest rates, West Australians remain very confident about the state’s economic prospects, so we are expecting high levels of consumer spending and local business investment to continue," Nicolaou said.

He said record amounts of non-residential and engineering construction work were still in the pipeline and the prospect of new projects commencing remained high.

Business investment in the current financial year is forecast to be up by two per cent and by a further 4¼ per cent in 2007-08, building on the phenomenal 46 per cent growth of 2005-06.

Nicolaou said that there was also growing evidence that the strong jobs market in WA was encouraging higher levels of migration into the state, both from other parts of Australia and from overseas.

"Western Australia currently leads the nation in population growth, with a net 25,000 people migrating into the state over the past 12 months, and this should continue to support household spending and dwelling investment at high levels."

"This growth in the labour pool is critical to the state’s economic well-being, given the labour shortages that pervade WA industries across a range of occupations."

The boost to the state’s labour supply would help ensure positive jobs growth and keep the state’s unemployment rate at current 30-year lows.

Nicolaou said that despite the positive outlook, domestic and global risks remained.

Domestically, capacity constraints continued to be a major issue for the future growth of the WA economy, with labour and materials shortages threatening to clog activity, particularly in the resources sector.

These constraints had also brought generalised price pressures, necessitating higher interest rates.

The extent to which the three interest rate increases of 2006 would impact on economic growth was yet to be determined, with the key concern being the impact on the non-mining states of New South Wales and Victoria where growth was sluggish even before to the November tightening.

Internationally, concerns remained over the potential for a slowdown in the US economy. However with inflation and economic growth in the USA easing recently, the case was building for a loosening in US monetary policy in 2007, which may provide a boost to consumers in the world’s largest economy.