The latest quarterly outlook highlighted an economy that continues to gather momentum, fuelled by a continuation of the investment boom and high levels of consumer spending.

The WA economy expanded by an impressive 9.7 per cent over the year to December 2007 amid numerous domestic and global risks.

During 2007, the WA economy contributed 20 per cent of the growth in the national economy despite accounting for just 10 per cent of the population - reinforcing the message that WA is the driving force behind the nation's recent success.

The report found the long-expected surge in exports had yet to materialise following the unprecedented levels of investment undertaken in recent years. Offsetting weaker export returns has been a stronger domestic economy, with consumer spending and housing investment rising strongly in the wake of the strongest population growth in the nation.

After such a prolonged period of growth, it is clear that the economy is going through some significant growing pains, primarily in the form of acute labour shortages which are impacting on the capacity of the economy to expand.

Fortunately, WA has been able to attract people from interstate and overseas to help fill record job vacancies throughout the state. Indeed, Western Australia's population grew by a 17 year high of 2.4 per cent over the year to September 2007 - the fastest rate of population growth in the nation.

The outlook for the WA economy remains healthy, with CCI still expecting the economy to grow by 6.5 per cent in 2007-08 and 6 per cent in the next couple of years thereafter, easily outpacing growth anywhere else in the nation.

While these forecasts are largely unchanged from the previous quarter, the drivers of growth have changed, with the domestic economy remaining the principle influence on the economy in the near term.

Exports have been revised down, with growth of 7 per cent for 2007-08 now expected. Thereafter, exports are expected to accelerate with growth in excess of 10 per cent per year.

Nationally, growth in the recently dormant larger states of NSW and Victoria picked up towards the end of 2007. However, consensus forecasts compiled by CCI suggest the recent global credit crisis, which has shaken financial markets and confidence around the world will be felt in Australia, with GDP forecasts revised down. Nevertheless, the national economy is still expected to grow by 4 per cent in 2007-08 and 3.5 per cent in 2008-09.

The emergence of price pressures around the nation has been a symptom of an economy that has gone through 16 years of uninterrupted economic growth. With underlying inflation reaching 3.4 per cent over the year to December, and forward indicators suggesting continued strong demand, the Reserve Bank chose to increase interest rates in February and March. Early signs suggest that these most recent rate rises are having the desired effect, with both retail spending and credit growth moderating in recent months.

On the global front, the US economy has been hit hard by the financial market meltdown with latest figures showing the world's largest economy stalled in the last quarter of 2007. This has had some impact in the two other major global economies of Japan and Europe with economic growth moderating by the end of 2007. In contrast, the outlook for the Chinese economy remains very strong, courtesy of the significant amounts of investment activity being undertaken in China.

By John Nicolaou

Chief Economist,
CCI Economics and Industry Policy