WA Economic Outlook Keep calm and carry on - Deloitte
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WA Economic Outlook WA Economic Outlook Keep calm and carry on March 2020 1
The coronavirus has As Australia’s most export-oriented
state, Western Australia will feel the
Chart 2: Iron concentrate
Composition of WA exports to China
added uncertainty to impact of any prolonged economic by value, 2019
the pace of WA’s weakness in China. WA exported
$96 billion worth of goods to China
3%
2% 3%
economic recovery, in 2019, representing 53% of the 4%
which in recent months total value of the State’s exports. In
contrast, China was the destination 6%
has shown more for just 27% of exports by value
promise. from the rest of Australia (Chart 1).
Chart 1: Eastern exposure
The global economy has entered the Exports to China as share of total
exports, by value 82%
new decade beset by short-term
uncertainty, as the outbreak of the 60%
WA
novel coronavirus dampens Rest of Australia
Iron ore Oil and gas
momentum from 2019. 50% Other raw materials Gold
Agriculture Other
The ultimate economic impact of the 40% Source: ABS.Stat; DMIRS
coronavirus is difficult to quantify as
Iron ore prices are always volatile,
the scale of the outbreak continues 30%
and the coronavirus outbreak has
to evolve. The OECD has estimated
only exacerbated this, but there are
that real global GDP growth could 20%
two potential upside risks that
decelerate to 1.5% in 2020, well
suggest further dramatic falls in
below the 3.0% forecast before the 10%
prices are unlikely.
virus hit. That prediction is based on
a scenario where the spread of the 0% First, Beijing is yet to announce the
virus outside of China is mostly mild scale of its stimulus response to
and relatively well-contained. A counter the coronavirus’ effect on
more severe outbreak outside of Source: ABS Cat. 5368.0 its economy. Its response to the
China could reduce global growth 2008 financial crisis was in the
further. This crisis shines a light on the need
order of US$500bn and directed
for Western Australia to diversify
mostly toward capital investment –
As at early March, the outbreak had our export base, over time. In
if the magnitude of the coronavirus
frozen some parts of the Chinese 2019, WA exported $79bn worth of
stimulus package is anything like
economy, leaving components of iron ore to China, accounting for
that, Australian exporters could
the domestic supply chain at a 82% of exports to that country. A
expect a spike in demand for
standstill (although some areas are further $12.5bn (13%) of our
steelmaking inputs including iron
returning to normalcy). Beijing has exports to China came from LNG,
ore and metallurgical coal.
flagged stimulus measures to keep gold, copper, nickel and other raw
the wheels turning, but neither the materials, while WA pastoralists and Second, growth in iron ore supply is
impact of the outbreak nor the graziers exported a combined expected to be relatively limited in
magnitude of the response is clear. $1.6bn in agricultural products 2020. The Australian majors are
Early estimates suggest the virus (Chart 2). investing in replacement capacity to
could shave anywhere from 0.2 to maintain – rather than materially
1.0 percentage points off China’s Spot iron ore prices fell by more increase – their export volumes.
full-year GDP growth, causing it to than 15% in the first week of And while Vale intends to add 48
fall short of Beijing’s 6-6.5% target. February, as markets adjusted to million tonnes of capacity this year,
the potential decline in demand that represents only half of the
The global economy is more from China. But prices bounced supply taken offline in the wake of
interconnected than the past, and back and stabilised around US$86/t the 2019 tailings dam disaster.
China represents a much greater over the second half of February,
slice of the economic pie (around only slightly down on the average In contrast to China’s significance
one-sixth of global GDP) than ever US$92/t observed over 2019. as an export market, it represents a
before. The impacts of China’s much smaller share of Western
economic stumble will be felt even Australia’s imported goods. China
in countries where the coronavirus accounted for 16% of WA’s
itself presently poses little to no
direct threat.
2
imported goods in 2019, compared would result in a greater economic chalks up four consecutive quarters
to 27% for the rest of Australia. impact to Australia. of accelerating growth in SFD, and
the strongest year-on-year growth
WA’s imports from China are WA has always been an export- figures since March 2014 (Chart 5).
dominated by intermediate inputs to oriented state, but the external
other production processes, rather sector has played a particularly Chart 5: Down and up again
than final consumer goods. In 2019, important role in recent years due Contributions to year-on-year
the State imported $2bn worth of to weakness in the domestic growth in real state final demand
machinery and transport economy. In the wake of the end of 2%
equipment, $1.1bn in manufactured the mining investment boom, WA’s
0%
inputs and $790m in chemicals and domestic economy shrank in five of
fuels, collectively representing 73% the six years between 2013-14 and -2%
of the total value of imports from 2018-19, contracting (in real terms)
-4%
China. In contrast, non-perishable at an average rate of 2.7% per
consumer goods – such as clothing, annum. In contrast, over the same -6%
footwear and furniture – period, net international exports
-8%
represented 10% of imports from grew at an average rate of more Households
Dwelling inv.
China, with food and beverages than 12% per annum (Chart 4). -10%
Public sector
accounting for just 1% (Chart 3). -12%
Business
Chart 4: Export heroics SFD
Chart 3: More than loo rolls Contributions to year-on-year -14%
Composition of WA imports from growth in WA real gross state
China by value, 2019 product
16% Source: ABS Cat. 5206.0
Hundreds
17% 12% Household consumption grew by
1.4% year-on-year, ticking up from
8%
37% the 1.3% growth observed in the
10% previous quarter. Growth was
4%
mainly driven by increased
0%
expenditure on household
15%
-4% necessities like rent, healthcare,
insurance and utilities. However,
21%
-8% growth in discretionary spending on
recreational and cultural activities
Machinery and equipment
Manufactured inputs and at hotels, cafes and restaurants
Chemicals and fuels Domestic demand also grew strongly over the year,
Consumer goods Net international exports suggesting a moderate pick-up in
Other Gross state product
consumer sentiment.
Source: ABS.Stat Source: ABS Cat. 5202.0
While the trend in household
Despite representing a relatively The magnitude of the coronavirus’ consumption is positive, this is
small share of WA’s total imports, impact on WA’s external sector is another area at risk from the
many chemical products and unknown, but the risk of a material coronavirus outbreak. Despite the
manufactured goods imported from hit places renewed significance on relatively low probability of the virus
China are critical inputs to the the domestic economy and reforms having a widespread direct impact
resources sector. Therefore, while which drive economic diversity, on WA consumers, the speed and
WA is likely to feel the impact of the builds economic and social scale of the global outbreak is likely
coronavirus predominantly through resilience, and improve productivity. to weigh on consumer sentiment in
reduced Chinese demand for our
the short term. Households
export goods, this impact will be Household consumption,
anticipating worsening conditions
compounded if WA businesses face business investment boost may seek to batten down the
barriers in importing intermediate domestic demand hatches by converting disposable
inputs produced in China. The State’s domestic economy income to saving, rather than
finished 2019 on a high note. Real additional spending – perhaps with
While China is understandably the
state final demand (SFD) – a the notable exception of sudden
focus in the short term, an
measure of economic activity that demand for hand sanitiser, face
escalation in the outbreak outside of
excludes exports and imports – masks and, inexplicably, toilet
China – leading to more widespread
grew by 1.7% in year-on-year paper. Building confidence must be
disruption in global supply chains –
terms to December 2019. That
3
a critical element of any commencing construction. The up a fifth consecutive year of
government and business response METRONET program tops the list, decline. The median house price
to the virus. led by its cornerstone Morley- was approximately 13% lower in
Ellenbrook greenfield rail project, December 2019 than at the peak
Business investment grew 6.7% in together with a series of major road achieved in the first quarter of
year-on-year terms to December upgrades including the Bunbury 2014. However, there are signs that
2019. Growth was driven by Outer Ring Road and Mitchell the housing market is stabilising.
machinery and equipment Freeway extension to Romeo Road.
purchases and investment in IP While median prices remain low,
products, particularly related to the And although the boom-time appetite among buyers appears to
mining industry. Commercial fervour is firmly in the past, the have shifted, with sales volumes
construction activity was flat over resources sector is still the source of growing by 2% over the year to
the year, detracting from total around two-thirds of WA’s December 2019 (Chart 7). That’s
business investment growth. But investment project pipeline. the first full year of growth in sales
there are signs that the tide is volumes since mid-2014.
turning for non-residential In the near term, that activity will
construction. be centred around replacement Chart 7: Housing hangover
investment by the iron ore majors Year-on-year change in rolling
Deloitte Access Economics’ latest to sustain production levels: Rio’s annual median house price and
Investment Monitor recorded an $3.8bn Koodaideri, BHP’s $4.6bn sales volume, Perth metro area
increase in the total value of WA’s South Flank, and Fortescue’s $1.8bn 10%
infrastructure pipeline for the first Eliwana and its $3.8bn Iron Bridge
time in nine years. Investment projects. 5%
projects totalling $157 billion were
recorded in WA in December 2019, Towards the less certain end of the
spectrum, there is $55bn worth of 0%
a 28% increase on the value of the
pipeline from the previous potential investment activity in LNG,
December (Chart 6). That still including Woodside’s Scarborough -5%
represents a significant decline on and Browse projects and a potential
the $288 billion peak in 2012 – fourth LNG train at Chevron’s -10%
when megaprojects such as Gorgon Gorgon.
were still under construction – but -15%
But it’s important to note that the
the recent uptick is most welcome. % change in sales volume
bulk of projects in the pipeline % change in median price
($123bn or 78%) are classified as -20%
Chart 6: Definitely maybe Dec-13 Dec-15 Dec-17 Dec-19
Value of WA investment project ‘under consideration’ or ‘possible’,
pipeline meaning no formal investment Source: Real Estate Institute of WA
$300bn 90%
decision has yet been made.
Developments in the rental market
80%
Worsening global economic
also suggest that housing demand is
$250bn fundamentals could result in these
70% gradually catching up to supply. The
prospective projects being delayed
$200bn 60% residential property vacancy rate for
indefinitely.
$150bn
50% the Perth metropolitan area fell to
40%
Dwelling investment, house 2.4% in December 2019, down from
$100bn 30% 2.9% the year prior. Further,
price decline continues
20% median rents grew steadily through
$50bn The major detractor from growth in
10% 2019 and the number of properties
the State’s domestic economy in
$0bn 0% available for rent has fallen.
2019 was dwelling investment,
which fell by 16% in real terms While these are signs of modest
year-on-year to December. The improvement, we expect low house
Planned ($bn, left axis) decline was strongest in purchases prices to continue to weigh on
Definite ($bn, left axis)
of new and used dwellings, while household sentiment. The median
Mining share (%, right axis)
investment in alterations and price has fallen to roughly where it
Source: Deloitte Access Economics Investment
Monitor, December 2019 additions declined by 9% over the was in early 2012, and it will take
year. plenty of time for the recent losses
Much of that improvement is
House prices in the Perth in value to be reversed.
attributable to public transport and
road infrastructure projects that metropolitan area are estimated to
have gradually moved closer to have fallen by 4% in 2019, chalking
4Population, employment growth moving over time. Trend Budget surpluses soar
ticking up unemployment sat at 5.7% in The State Government ended 2019
We said in our last WA Economic January 2020, down 0.5 percentage on a fiscal high note: WA Treasury’s
Outlook that Western Australia was points from the previous January mid-year Budget update revealed
losing the all-important economic (Chart 9), a two-and-a-half-year that the general government sector
numbers game: population growth. low. was on track for a $2.6 billion
That’s still the case relative to the surplus in 2019-20. That’s more
rest of Australia, but the numbers Chart 9: Unemployment easing than $1bn higher than Treasurer
are shifting in the right direction. WA unemployment rate, original Ben Wyatt forecast when he handed
data and trend series down the Budget in May 2019.
WA’s population grew by 1.1% 8.0%
year-on-year in June 2019, inching Much of the improvement resulted
Hundreds
above the 1.0% growth achieved in 7.5% from a $1.1bn upward revision in
the previous quarter. Growth was iron ore royalty estimates, based on
7.0%
helped by net overseas migration of spot prices continuing to exceed
approximately 16,000 people, a six- 6.5% Treasury’s conservative forecast of
year high. And while net interstate US$73.5/t for 2019-20. The mid-
6.0%
migration remains negative, it is year Budget update showed
now at a five-year low and heading 5.5% Treasury’s forecast of royalty
back towards positive territory revenue is based on further
(Chart 8). 5.0% conservatism, with expectations of
4.5%
an iron ore price of US$65/t over
Original
Chart 8: Here we grow again Trend the forward estimates. This gives
Contributions to year-on-year 4.0% the State Budget some breathing
growth in WA population Jan-17 Jan-18 Jan-19 Jan-20
room should things unexpectedly
3.5%
Source: ABS Cat. 6202.0 worsen in China.
Hundreds
3.0%
2.5% But there are still a few cobwebs to In total, surpluses worth a
2.0% be cleared away in the job market. cumulative $10bn are forecast over
1.5%
the forward estimates period (Chart
First, the aggregate job creation 10), leaving the State Government
1.0%
numbers mask the fact that there with plenty of fiscal firepower to
0.5%
were 8,000 fewer people in full-time fund its initial $607m coronavirus
0.0% employment in January 2020 stimulus package and any further
-0.5% relative to a year prior, offset by State-level stimulus, in addition to
34,000 additional people in part- the estimated $17.6bn stimulus
time employment. package announced by the
Net interstate migration Commonwealth.
Net overseas migration Second, the spoils are not evenly
Natural increase
Total population growth distributed across the State. Chart 10: Fiscal firepower
Source: ABS Cat. 3101.0
Unemployment in parts of north- WA general government net
west WA range as high as 15%, and operating surplus/deficit
Labour market conditions have also although Perth’s coastal and inner $3bn
improved since our last WA suburbs are faring relatively well,
Economic Outlook. More than the jobless rate remains in double- $2bn
26,000 jobs were created in WA digits in outer suburbs like $1bn
over the year to January 2020, Armadale and Kwinana.
representing year-on-year growth of $0bn
2.0%. More importantly, Third, job gains in 2019 were
employment growth steadily concentrated in a handful of -$1bn
accelerated each month in 2019. industries – notably mining,
-$2bn
professional services, and health.
Monthly unemployment data are Gains in these industries masked -$3bn
notoriously volatile, and so a more almost 40,000 fewer jobs across the
stable measure of trend agricultural, manufacturing,
unemployment – which abstracts construction and hospitality sectors. Mid-year update (Dec '19)
from seasonal factors and one-off The retail and wholesale trade Budget forecast (May '19)
Actual
shocks – provides a clearer view of sectors also fared poorly.
Source: WA Treasury
how the State’s jobless rate is
5Contacts
Noel Richards James Campbell-Sloan Aiden Depiazzi
Partner Director Senior Economist
Deloitte Access Economics Deloitte Access Economics Deloitte Access Economics
Tel: +61 8 9365 7303 Tel: +61 8 9365 7110 Tel: +61 8 9365 7853
norichards@deloitte.com.au jcampbell-sloan@deloitte.com.au adepiazzi@deloitte.com.au
Deloitte Access Economics
Level 9, Brookfield Place, Tower 2
123 St Georges Terrace
Perth WA 6000 Australia
Tel: +61 8 9365 7000
www.deloitte.com/au/deloitte-access-economics
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