The WA economy has been resilient in the face of the negative effects from higher interest rates and global economic uncertainty by continuing to grow strongly.
The latest WA Economic Compass report released by CCI today finds that capacity building by business was again the primary driver of economic activity in the state, accounting for 90 per cent of growth in the economy during the March quarter, and around half of domestic economic growth over the year.
A record $34.1 billion was invested by business in WA over the year to March 2008.
Investment activity of this scale helped offset the interest rate-induced slowdown in household spending and housing investment, both of which contracted in the first quarter of 2008.
Despite these falls, WA’s domestic economy grew by nearly 7 per cent over the year to March, and remains a key driver of the national economy, accounting for almost 20 per cent of total domestic output.
Across the nation, the pace of economic growth has slowed in recent times. The national economy, as measured by Gross Domestic Product (GDP) grew by 0.6 per cent during the March quarter of 2008, the smallest quarterly increase in two years. Over the year, GDP expanded by 3.6 per cent.
The report also shows that six years of investment and expansion amongst the state’s key export industries are now translating into a stronger trade position for WA. Over the quarter, the volume of exports from WA surged 5.8 per cent, with exports now 8.1 per cent higher over the year to March.
Looking forward, CCI remains very optimistic about the prospects for the WA economy.
After forecast growth of 6½ per cent in 2007-08, the WA economy is expected to expand by a further 5½ per cent in 2008-09. The easing is expected to result from a further moderation in consumer spending and a pause in investment activity after the completion of a number of key projects across the state.
While the impact of the state’s gas crisis is not yet known with any certainty, it is likely to have a detrimental affect on production levels across a number of key industries, and potentially cut GSP growth marginally in the September quarter.
Looking further ahead, the WA economy is expected to grow by 6¼ per cent in 2009-10 and 2010-11, backed by an export sector which is likely to continue to ramp up production.
Such a positive outlook will mean that labour market conditions will remain tight, with the unemployment rate likely to remain at current historic lows and record high levels of labour force participation. Strong population migration from interstate and overseas will help to ease the supply constraints associated with an economy that is already close to full employment.
Mounting inflationary pressures are still a risk to the domestic economy, despite the RBA increasing official rates to the highest level in more than a decade. The potential for higher interest rates and persistent inflation pose genuine risks to the positive domestic outlook, particularly for states such as NSW and Victoria, whose economies have been buoyed by a housing-led recovery.
While high interest rates will continue to impact on key sectors of the WA economy, the key risk is the extent to which global inflation and a housing-led slowdown in the US economy impact on the broader global economy, particularly the state’s key trading partners in China and other developing Asian economies. To date, the impact of the US slowdown on China has been minimal, and is not expected to significantly alter China’s impressive growth performance in the near term.
The outlook for financial markets will have some bearing on the strength or otherwise of the global economy due to the negative wealth effects associated with the significant falls in stock markets around the world.
Statement by CCI Chief Economist, John Nicolaou