WA ECONOMIC OUTLOOK Friday, 22 June 12 Summary: Western Australia has been an engine of growth for the Australian economy over the past few years. State final demand grew at an annual pace of 1.% in the year to the March quarter, well above its long-run average of 7.%. The biggest driver of growth in the Western Australian economy, much like the Australian economy, is private business investment. The boom in investment has been largely driven by the mining industry, although there have been flow on effects to non-mining construction. Business investment rose by.3% in the year to the March quarter 12 in Western Australia, much stronger than annual growth of.6% recorded for Australia in the year to the March quarter. Despite announcements from major miners to scale back or defer some projects, the pipeline for business investment in Australia in coming years is very strong. Much of this centred on engineering construction for the resources industry in Western Australia. The ABS estimates $6bn of engineering construction work in the pipeline in WA. According to the Bureau of Resources and Energy Economics, the total value of mining projects in the advanced stages of development amount to a phenomenal $13. billion. The boom in mining and related investment has flowed to other parts of the WA economy. Unlike other States, retailing has been growing at close to its strongest pace in nearly five years. Household consumption has also made a healthy contribution to growth in Western Australia. The labour market in WA has also defied national trends, with Western Australia adding the most jobs of all States in the year to April. The unemployment rate in WA has fallen over the past year to 3.%, the lowest in more than three years and the lowest across the country. Lower commodity prices and moderating growth in China are weighing on export values. However, growth in export volumes has been healthy and should continue to see solid growth as recent investment boosts production capacity. Further, we expect that China can avoid a sharp slowdown in growth, which suggests that commodity prices will stay high by historical standards. Western Australia s exports account for around per cent of Australia s exports. Western Australia s major exports include iron-ore, gold, crude petroleum, natural gas, wheat and copper ores and concentrates. While export growth has been healthy, import growth has been very strong as the business investment boom demands a large amount of imported capital goods. Since peaking in 9, the housing market has been soft in Western Australia. Strong wages growth and buoyant economic activity should lead to a recovery later this year, provided the global outlook does not significantly deteriorate. Population growth is accelerating once again as strong labour demand attracts new residents. Recent rate cuts from the RBA with the possibility of more to come will also support the housing market. However, low housing affordability is likely to limit significant gains in house prices. The downside risks for the Western Australian economy in the near term include the possibility that China undergoes a much sharper slowdown than expected. Further, there is the potential that the European sovereign debt crisis significantly dampens global growth. However, while a sharp slowdown in China would dampen Australian export growth, the large impetus from business investment is likely to remain. Another upside is that the Reserve Bank (RBA) has ammunition to cut interest rates should global conditions take a turn for the worse. Western Australian Economic Outlook 22 June 12 1
Percentage Shares of the Economy* Industries WA Australia Mining 31.2. Construction 13.1 9. Manufacturing 6.9 9.6 Professional, scientific and technical services 6.6 7.7 Transport, postal and w arehousing.9 6. Financial and insurance services. 11.3 Health care and social assistance.7 6. Retail trade 3.9.2 Wholesale trade 3.6.9 Education and training 3.2.2 Public administration and safety 3.1. Administrative and support services 2.3 2. Electricity, gas, w ater and w aste services 2.2 2.6 Information media and telecommunications 1. 3. Rental, hiring and real estate services 1.7 2. Other services 1. 2. Agriculture, forestry and fishing 1. 2. Accommodation and food services 1.3 2.7 Arts and recreation services.6 1. * Share of gross value added less ownership of dwellings; Source: ABS, St.George Economic Growth Western Australia has been a powerhouse of the Australian economy over the past few years. State final demand grew by a very strong 7.% in the March quarter 12. Annually, State final demand is growing at a pace of 1.% and has been growing at a double-digit pace over the past three quarters. This is well above the -year average of 7.% growth, and domestic final demand of.% nationally in the year to March 12. State final demand has largely been driven by business investment which is occurring within the mining sector, although household consumption has also been growing at a very strong pace. Note that ideally, gross state product (GSP), which includes inventories and net exports, would be used to assess broad economic growth but the data isn t available quarterly (only annually). Growth in export volumes of traded goods has picked up after severe weather disruptions last year. Annually, goods export volumes rose 3.7% in the year to March 11, improving from a 3.1% decline a year ago. Although Chinese growth has moderated this year, it remains solid and should continue to support Australian commodity exports. Western Australian exports are an important driver of Australian economic growth, accounting for around per cent of national exports. Major exports from Western Australia include iron ore and concentrates, gold, crude petroleum, natural gas and wheat. The large scale of business investment should greatly increase export capacity in Western Australia in coming years. Natural gas will become an increasingly important export given there are a number of LNG projects underway. Western Australian Economic Outlook 22 June 12 2
While growth in export volumes has been healthy, imports have been growing at a very strong pace. The business investment boom is demanding a large amount of imported capital equipment and is supporting imports. Imports of traded goods grew at an annual pace of.7% in the year to March 12. The high Australian dollar is also boosting demand for other imports, while weighing on non-commodity exports. We expect that net exports will subsequently detract from WA s growth in 11-12. However, State demand is likely to continue to be very strong. The business investment upswing has further to run and is also providing a large boost to activity to other parts of Western Australia s economy. A pick up in population growth will further support economic activity. 1 State Final Demand (annual % change, Q1 12) 1 % WA State Final Demand % LR annual average Annual % Change 1 - NSW VIC QLD SA WA TAS NT ACT Aus Quarterly % change - 97 99 1 3 7 9 11 13 - The outlook for Western Australia is also dependent on the outlook for China and the global economy. There remains a risk that Chinese growth slows more sharply than anticipated and the debt problems in Europe could weigh significantly on global growth. These factors could weigh on sentiment and therefore consumer and business spending in Western Australia. We however remain positive for Chinese growth prospects given the large potential for fiscal and monetary stimulus from authorities. Furthermore, while a sharp slowdown in China would dampen Australian export growth, the large impetus from business investment is likely to remain. The Western Australian Treasury expects robust economic growth in 11-12 and 12-13 of 6.% and.7% respectively. These forecasts have been upgraded since previous estimates were made in 11 and are above the -year average growth of.7%. Our forecasts are stronger than Western Australian Treasury and we expect that the large investment pipeline is likely to continue over the next few years. We expect economic growth of 9.% and 6.% in 11-12 and 12-13 (see page for detailed forecasts). Consumer Spending Consumer spending in Western Australia has been solid, supported by low unemployment and strong wage growth. Household consumption grew at an annual pace of 6.9% in the year to March 12. This is above the -year average of.9% and national household consumption growth of.2% in the year to March 12. Household spending growth in Western Australia has been strong across most categories, but growth has been particularly firm in services, a phenomenon occurring Australia-wide. In the year to March 12, spending on recreation & culture (1.%) and hotels, cafes & restaurants (1.7%) were the strongest. Western Australian Economic Outlook 22 June 12 3
16 Value of Retail Sales (trend, annual % change) 16 Index 1 Consumer Sentiment (3-month moving average) Index 1 12 12 13 WA 13 WA 1 1 1 1 National 9 Australia 9 Jan- Jan-6 Jan- Jan- Jan-12 2 6 12 Evidence of consumer caution is much less apparent in Western Australia. The Westpac- Melbourne Institute survey of consumer sentiment indicates that consumers in Western Australia are the most optimistic in 1 months. The index for Western Australia was at 116.3 as of June 12, while for Australia; the index posted a reading of 9.6. Readings above indicate optimists outweigh pessimists, while readings below indicate the opposite. Therefore, consumers are more optimistic than pessimistic in Western Australia, while consumers are generally more pessimistic in other parts of Australia. More upbeat consumers are also reflected in strong retail spending in Western Australia. While retail sales nationally have been suffering under the weight of consumer caution and growing competition from online, retail sales in Western Australia are growing at close to their strongest pace in around four years. In the year to April, Western Australian retail spending rose 9.% in the year to April 12. Growth is well-above retail spending nationally which grew at an annual pace of 2.% in the year to April 12. Index 2 House Prices (ABS measure) Index 2 6 Western Australia Migration Flows (', quarter rolling sum) Perth Overseas Migration 16 16 Australia 1 1 Interstate Migration Mar-3 Mar- Mar-7 Mar-9 Mar-11-2 6 9 9 9 2 6 Housing The housing market in Western Australia has been soft since house prices peaked in 9 in line with the housing market across Australia. Recent data from the Australian Bureau of Statistics (ABS) however, points to some improvement with house prices in Perth having risen 2.% over the two quarters to March 12. But the evidence of a recovery is tentative; Perth house prices were still down 1.7% in the year to March. This compares to house prices across Australia which have fallen.% in the year to March. Western Australian Economic Outlook 22 June 12
Another measure, from RP Data-Rismark, suggests that Perth dwelling prices are still sluggish, and fell 1.7% in May. In annual terms, Perth dwelling prices were down 3.9% in the year to May. Soft growth in house prices has kept the brakes on residential construction. Dwelling investment has been lacklustre, and fell by 11.7% in the March quarter 12. On an annual basis, dwelling investment was down 22.2% in the year to March, the weakest annual pace in nearly 11 years. A crowding out effect may be a factor in weak residential construction as resources are diverted to strong growth in construction in other areas; namely engineering construction. A modest undersupply of housing exists according to BIS Shrapnel, thanks to subdued residential building activity. Further, the pace of dwelling construction in the near-term is unlikely to keep up with growing demand which is being supported by a pickup in population growth. After slowing throughout 9 to, population growth is accelerating once again as strong demand for labour is attracting new residents. Migration from overseas and interstate has picked up and annual population growth has accelerated to 2.9% as of December 11, the fastest pace in two-and-a-half years. Meanwhile, leading indicators such as building approvals are pointing to subdued growth in the near-term (even when taking into account an aberration in recent data due to legislative changes to the approval process in WA). %. Vacancy Rates (March quarter 12) ' WA Population & Housing rolling annual total 3. 6 2. Population Growth 1.. Syd Melb Bris Adel Per Hob Dar Canb Dwelling Starts 9 93 96 99 2 11 Another indication of a tight housing market in Perth is its low vacancy rates. Vacancy rates were 1.9% in the March quarter 12, according to the Real Estate Institute of Australia (REIA). Vacancy rates below 2% indicate super-tight rental markets or very strong demand for rental accommodation. This also suggests that rents have further to rise. Rents in Perth have already witnessed very strong growth. For a three-bedroom house, rents grew at an annual rate of 9.%, and rents for a 2-bedroom other dwelling rose.1% in the year to March 12. We expect soft growth in house prices to continue over the next few months, particularly while the problems in Europe and turmoil in financial markets weigh on sentiment, keeping potential home buyers sidelined. However, there are factors which are setting the conditions for a house price recovery in Western Australia later this year, provided that global developments do not deteriorate significantly. The emerging shortage of housing will be supportive of house prices, with the pickup in population growth providing a boost to housing demand. Additionally, wages in Western Australia grew at the strongest pace in nearly three years at an annual rate of.% in the March quarter, supported by very low unemployment. Rising rents will also help attract investors to the market. However, we do not expect the same capital growth in house prices seen in recent years, given that housing affordability remains low. Western Australian Economic Outlook 22 June 12
A house price recovery should eventually flow through to residential construction, although this may not occur till the end of the year or early next year. Business Investment Business investment in Western Australia is strong and has largely been driven by the mining sector. High commodity prices have lifted the return on capital and increased prospective mining investments. Business investment rose by very robust.3% over the year to the March quarter in Western Australia, up from growth of 26.6% in the year to the previous quarter. This compares with.6% annual growth for Australia-wide in the year to March 12. Moreover, the pipeline of business investment is extensive, indicating that the outlook is for investment spending to remain strong. Nationally, according to ABS data, we estimate that firms intend to increase capital expenditure by approximately 3.6% in 11-12 and 33.7% in 12-13. A large proportion of this investment is likely to occur within Western Australia. Another component of business investment is engineering construction, which is also strongly linked to mining. The pipeline for engineering construction is high nationally and particularly so in Western Australia, largely reflecting strong infrastructure demand from the resource sector. According to the ABS, the work yet to be done in engineering construction amounts to a massive $6bn within Western Australia as of December 11. $bn 16 WA Capital Expenditure (by asset) $bn 16 WA Engineering Construction Activity $bn (qtr avg) $bn 7 7 6 6 12 Buildings & Structures 12 Work Yet to be done Total Plant, Machinery & Equipment 9 93 97 1 9 13 3 Work done Work commenced 7 91 9 99 3 7 11 3 A slowdown in Chinese growth indicates that there is a risk that some of the work in the pipeline will be scaled back. Indeed, some of the major miners have indicated that they are holding off approval of any new large-scale projects. However, even if some of the expected business investment is wound back, we still expect very strong growth this year and next. This is also in part because many mining projects are in the advanced stage of development and are either currently under construction or committed. Therefore these projects are very unlikely to be scaled back. According to the Bureau of Resources and Energy Economics, the value of mining projects at an advanced stage of development in Western Australia was worth a phenomenal $13. billion as of April 12. The volume of projects in Western Australia currently underway is dominated by some large LNG projects which include the $3 billion Gorgon LNG project and Chevron s $29 billion Wheatstone LNG project. Other mining projects include BHP Billiton s Rapid Growth iron ore project among other mineral projects. Western Australian Economic Outlook 22 June 12 6
While engineering construction has been a predominant driver of growth, non-residential construction has also been strong, picking up from lacklustre growth throughout -11. Non-residential building investment rose 1.7% in the year to March 12. Approvals data for non-residential buildings suggest that commercial construction activity will remain buoyant. The pickup is a good example of how the mining boom is impacting on non-mining sectors of the economy. Non-residential construction is supported by demand for accommodation camps and operations buildings in mine-related areas. Commencements in the health sector are also supporting non-residential construction led by the $ million Queen Elizabeth II Medical Centre Children s Hospital. Unemployment Rate (trend, per cent) Employment Change By State (Year to May 12, k) NSW 7 7 VIC 6 6 Australia QLD SA 3 WA 3 WA 2 2 6 12 2 Tas - 3 6 Labour Market The Western Australian labour market has performed well, particularly in comparison to the Australian labour market. Job growth in Western Australia has picked up in 12, taking annual job growth to a robust pace of.% in the year to May. The State added 9.6k jobs in the year to May, more than any other State. Further underscoring the relative strength in Western Australia s economy and recent strong job growth, the unemployment rate was the lowest among all States at 3.% as of May. It equalled the unemployment rate recorded in April, which was the lowest unemployment rate recorded in Western Australia in more than three years. Western Australia s unemployment rate sits well below the unemployment rate for Australia at.1%. The low unemployment rate in Western Australia points to a very tight labour market and a factor behind strong wage growth for the State. Wages grew at a strong annual pace of.% in the year to the March quarter 12. Indeed, wages have accelerated from an annual pace of.1% a year ago, while wages for Australia have slowed over the same period. In the year to March 12, wages grew at an annual rate of 3.6% down from a 3.9% pace recorded a year ago. Unsurprisingly, in the year to May, most jobs in Western Australia were created in the mining industry (26.k). The healthcare & social assistance (16.k), manufacturing (9.3k) and professional, scientific & technical services (.k) also added new jobs in Western Australia reflecting some flow on benefits from the mining boom to other sectors. Meanwhile, jobs declined in construction (-19.k), retail trade (-.9k), information, media & telecommunications (-3.7k) and administrative & support services (-3.6k). Despite strong growth in the mining sector in Western Australia, it is not the largest employer in the State. That honour goes to the healthcare & social assistance industry (which accounts for.7% of all jobs in WA), followed by the retail sector and then the construction industry. Western Australian Economic Outlook 22 June 12 7
Business surveys suggest that firms in Western Australia are becoming less positive about the outlook, but remain more optimistic than other States. The fiscal and financial problems in Europe and slowing Chinese growth suggest that there are downside risks to the outlook for Western Australia and for the mining sector. These uncertainties may lead to some softening in job growth. However, we expect the business investment boom to provide a large boost to job growth in mining, as well as other sectors of Western Australia s economy. St.George Banking Group Forecasts Economic Indicators, % Change -11 11-12 (f) 12-13 (f) 13-1 (f) Gross State product 3. 9. 6.. State Final Demand.7 13.7 9.. Employment 3. 2.6. 2. Unemployment Rate.... Perth CPI 2. 2. 3. 2.6 Wage Price Index..3.6.3 Source: St.George Banking Group The Western Australian Treasury expects robust economic growth in 11-12 and 12-13 of 6.% and.7% respectively. Our forecasts are stronger than Western Australian Treasury given the large investment pipeline is likely to continue over the next few years. Additionally, in coming years we expect export volumes to remain solid, as investment boosts capacity for export volumes. We expect economic growth of 9.% and 6.% in 11-12 and 12-13. Western Australian Economic Outlook 22 June 12
Contact Listing Chief Economist Hans Kunnen kunnenh@stgeorge.com.au (2) 93 Senior Economist Josephine Heffernan heffernanj@stgeorge.com.au (2) 93 71 Economist Janu Chan chanj@stgeorge.com.au (2) 93 92 The information contained in this report ( the Information ) is provided for, and is only to be used by, persons in Australia. The information may not comply with the laws of another jurisdiction. The Information is general in nature and does not take into account the particular investment objectives or financial situation of any potential reader. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the Information without first seeking expert financial advice. For persons with whom St.George has a contract to supply Information, the supply of the Information is made under that contract and St.George s agreed terms of supply apply. St.George does not represent or guarantee that the Information is accurate or free from errors or omissions and St.George disclaims any duty of care in relation to the Information and liability for any reliance on investment decisions made using the Information. The Information is subject to change. Terms, conditions and any fees apply to St.George products and details are available. St. George or its officers, agents or employees (including persons involved in preparation of the Information) may have financial interests in the markets discussed in the Information. St.George owns copyright in the information unless otherwise indicated. The Information should not be reproduced, distributed, linked or transmitted without the written consent of St.George. ********************************************************************************************************** Any unauthorised use or dissemination is prohibited. Neither St.George Bank - A Division of Westpac Banking Corporation ABN 33 7 7 11 AFSL 23371 ACL 23371, nor any of Westpac's subsidiaries or affiliates shall be liable for the message if altered, changed or falsified. *********************************************************************************************************** Western Australian Economic Outlook 22 June 12 9