Western Australia's economic transition gathers steam
As a state in transition, Western Australia's growth will slow notably in the short term, under the weight of the mining 'construction cliff'. However other sectors are showing signs of support for the state's economy.
Releasing its latest business outlook for Western Australia, leader of Deloitte Access Economics in WA, Matt Judkins said it is a case of the bigger they come, the harder they fall for the state.
"Western Australia's construction boom has been very big, meaning the downside potential is too," he said.
"However timing is everything and the ability for the State to manage a transitioning economy depends on how the move from mining construction to production plays out and the speed with which other sectors of the economy pick up.
"At the peak of the boom in 2012, a third of all spending in WA's economy was due to businesses' investment in capacity expansion – mostly new mines and equipment to feed rapid economic growth in Asia.
"It has always been the case that project spending drives the big cycles in WA's economy, and it is no surprise that the transitional shift from construction to production will create a down-tick in short-term growth prospects.
"WA's engineering construction sector has arguably been the single greatest benefactor of the resources boom. First it was iron ore that emerging Asia wanted in spades, and more recently WA has been betting the house on the expectation that there will be an equal appetite for its LNG reserves.
"Although iron ore prices are still solid and LNG prices are still protected by contract from the lower gas prices evident in US markets, the big question is how many more massive resource construction projects will WA manage to get off the ground as global competition for resource investment money heats up, and at a time when the world has already seen a glut of resource investment."
Deloitte Access Economics' Investment Monitor paints a picture of an investment landscape already in transition. The total value of projects has continued to trend down, as project completions have outpaced the new developments coming on line. This leaves a $100 billion hole in the project pipeline.
"All of this translates to a weakening short term growth outlook for the Western Australian economy," Judkins said.
"With more of that slowdown is projected to fall into 2014-15 rather than 2013-14, the growth we forecast in September's Business Outlook for 2014-15 has been revised down to 1.1 per cent.
"But this is not the disaster it may seem, as the big driver is a shift in the timing of the capital expenditure slowdown, rather than any fundamental change.
"Our medium term forecasts for Gross State Product (GSP) growth remain above the Australian trend, and we still see WA rebounding quickly to growth of around four per cent and retaining the mantle of Australia's fastest growing state over the next decade."
Judkins said that, in spite of the slowdown, there was still cause for optimism.
"There are important offsets to some of the weaknesses in the Australian economy, and this is particularly relevant here in WA," he said.
"While most of our economy is looking soft or at risk of softening, the State's housing construction sector is zigging at the time those other big drivers of growth are zagging.
"Housing finance is no longer growing in leaps and bounds, but it is well above its 2010 lows and, despite a recent lift in rental vacancy rates, building approvals are also making ground.
"In fact 2013 recorded the highest number of new private housing approvals since 2006. It looks as if 2014 may be the peak year for the current housing construction cycle, but we see good gains extending into 2015 and 2016 as well.
"As we have noted in our recent Building the Lucky Country publication, Positioning for Prosperity: Catching the next wave, there are significant additional opportunities for WA to broaden its reliance away from the resources sector in the future, although nothing will replace the mining sector.
"While a number of sectors of the economy will benefit from a lower Australian dollar, ultimately we need to offer something the world wants.
"As we move through coming years, we hope to see a renewed focus on agriculture, tourism and international education, three sectors we believe offer the economy the potential for further 'super-growth', albeit perhaps not on the same scale as the recent resources boom.
"It is these industries in which we which we have both a competitive advantage, but which also offer a growing global opportunity."
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