Despite remaining the economic powerhouse of the nation, the Western Australian economy begins 2008 facing a number of challenges which have the potential to limit future growth and investment.
The latest WA Economic Compass report found the state's economy continued to power ahead in the second half of 2007, buoyed by the massive investment program by WA business and high levels of consumer spending. However, while the outlook is bright, some domestic and global risks remain.
Capacity constraints such as labour shortages, higher wage pressures and a backlog of major infrastructure projects continue to restrain economic growth and business investment.
Notwithstanding the pressing capacity constraints, the WA domestic economy grew by a remarkable
12 per cent over the year to September 2007, making it easily the fastest growing state in Australia.
Importantly, such growth had been broadly based, with all sectors making valuable contributions to growth and development. The momentum that has been built across the economy in recent years has allowed the state to prosper in the face of rising domestic interest rates and global economic uncertainty.
Looking forward, the outlook is similarly positive, with CCI expecting the WA economy to grow by 6.5 per cent in 2007-08 and by 6 per cent over the medium term or next three years, ensuring that WA retains its place at the forefront of economic growth nationally.
As has been the case for the past six years, business investment remained at or near record levels, with the level of investment 37 per cent higher than the same time a year ago. CCI expects this trend to continue over the medium term as the train of investment projects continues to increase. By the end of 2007, there was more than $125 billion in investment projects waiting to be developed, which is equivalent to the size of the WA economy today.
There is evidence that the current six year investment cycle is starting to reap dividends, with export returns accelerating in recent quarters. Over the coming years, CCI expects exports to drive growth in the economy.
Labour constraints continue to plague the economy, and if measures are not adopted to boost the labour force, labour shortages have the potential to significantly impact on the ability of the economy to sustain its growth.
Nationally, economic conditions have continued to improve as growth picks up across most states, particularly in NSW and Victoria, which have been struggling to emerge from their housing-led slowdowns. Consensus forecasts compiled by CCI suggest that Australia's 16 year uninterrupted expansion cycle will continue, with GDP forecast to rise by 41/4 per cent in 2007-08 and by 4 per cent the year after.
Tight operating capacity has seen inflationary pressures mount, prompting the Reserve Bank to raise interest rates during November. However, the impact of the November rate increase remains to be seen, particularly in the non-mining states of New South Wales and Victoria, where growth is being led by consumers who are far more sensitive to interest rate rises.
With broader indicators of economic activity across Australia remaining very strong and price pressures continuing to rise, there is an expectation the RBA will raise interest rates in the near term.
Internationally, concerns remain over the potential for a slowdown in the US economy, as mounting inflationary pressures and the effects of the US sub-prime mortgage market crisis continue to be felt.
However, prospects for the global economy remain positive, largely fuelled by the remarkable growth of the Chinese economy, and a solid outlook for the major economies of Japan and Europe.
BY JOHN NICOLAOU
Chief Economist