There is cautious optimism Western Australia’s economy has begun to turn a corner, according to the latest Deloitte Access Economics WA Economic Outlook.
Western Australia Deloitte Access Economics lead Matt Judkins says the signs are positive.
“Some of the fundamentals are encouraging for the Western Australian economy. Consumer confidence has continued its recent upward trend, job vacancies have increased, 98% of jobs growth in the past year has been in full-time positions, and the numbers around exports remain strong.
“We also saw State Final Demand (a narrower measure of growth focusing on domestic activity) rise in the September quarter of 2017. In trends terms, this marks three straight quarters of growth, which is encouraging, but we need to see other indicators strengthen more to be confident that the bad times are truly behind us.”
Judkins adds: “Growth will be tepid in the meantime. We expect Gross State Product (GSP) to rise by 1.7% in 2018, followed by growth of 2.3% in 2019 and 3.0% in 2020 off the back of improving household consumption.”
2016-17 growth disappoints
In mid-November, estimates of GSP for the 2016-17 financial year showed the Western Australia economy had contracted by 2.7%. This ended a 26-year consecutive run of economic growth in the state since GSP accounts began.
“The sharp drop in the GSP caught many off guard,” says Judkins. “Thanks to rising exports, Western Australia’s headline GSP growth figure has until now remained in positive territory. However, 2016-17 marked a departure from this trend with rising exports unable to overcome broader weakness.”
The surprise drop in GSP came from lower than expected growth in household consumption, which increased by a modest 0.5% in 2016-17.
“Some of this lower than expected growth was due to statistical revisions, but household consumption is important to the state’s future growth prospects, making up 45% of GSP. With few other drivers of activity, we need to see consumer spending pick-up if broader growth is to be sustained,” says Judkins.
A sharp decline in business investment was also behind the negative GSP growth outcome (business investment fell by over $15bn or 28.6% in 2016-17).
The drop in dwelling investment didn’t come as a surprise either. Down by almost 20% in 2016-17, it contributed to the overall decrease in economic activity as the Western Australian housing market continued to suffer. However, building approvals in the residential sector rose for the six consecutive months to October 2017, giving a glimmer of hope to the residential construction sector.
2018: the year for hanging in there
Deloitte Access Economics Outlook sees Western Australia as just a year away from a return to some normality.
“Hanging in there is the name of the game for now,” says Judkins.
“However the normal we envisage is not the investment-fuelled highs of pre-2012, but rather something slower and more sustainable. Next year should mark the point at which Western Australia’s economy ceases its multi-year decline – but only just.
“We expect State Final Demand to rise by 0.1% in 2018, followed by 3% growth in 2019 and 3.2% in 2020. However, the wafer-thin growth expected for 2018 is predicated on strengthening household consumption.
“If consumers remain warier than expected, a five-year contraction in State Final Demand is not out of the question. So, to spend or not to spend? That is the question for Western Australian households in 2018.
“And the answer will have important ramifications for the broader state economy next year. Let’s hope the answer is the former.”