OUTLOOK July 2017 I Chamber of Commerce and Industry of Western Australia (Inc) THE CHANGING STRUCTURE OF THE WA ECONOMY ABOUT OUTLOOK Outlook is CCIWA s biannual analysis of the Western Australian economy. All growth rates cited in Outlook are calculated in terms of year-on-year growth, comparing four quarters of data to the previous four quarters of data, unless otherwise stated. The editor of Outlook is Nathan Viles, Senior Economist.
CURRENT STRUCTURE OF THE ECONOMY WA Australia Unemployment Rate 5.5% 5.5% Inflation 1.0% 2.1% Wages 1.2% 1.9% Population 0.7% 1.6% Exports 15.4% 8.1% Household Consumption 1.3% 2.5% Dwelling Investment -18.5% 4.8% Business Investment -30.1% -9.5% Domestic Final Demand -8.0% 1.6% Gross Domestic Product - 2.3% Notes: Current as at 10 July 2017. OUTLOOK AT A GLANCE The Western Australian economy continues to adjust to the end of the resources investment boom. It s a slow process and the changing structure of the economy reveals itself one data point at a time. However, we are now in a good position to look back on the significant adjustment that s already taken place and look for clues on where the economy might be heading. This edition of Outlook shares insights from the CCI economics team on the new normal in the WA economy. The WA economy is fragile. CCI expects WA will only narrowly avoid recording a recession for 2016-17 and 2017-18, with increased exports the saving grace that will prevent the economy from entering negative territory. State Final Demand (SFD), often referred to as the domestic economy, is expected to contract for the fourth consecutive year in 2016-17, and only return to positive growth in 2018-19. The annual average unemployment rate is forecast to remain stubbornly high above 6 per cent for the rest of the decade. Overall, our forecasts for the WA economy tell the story that business investment will reach the bottom of its fall within the next two years, prompting a narrowing of spare capacity in the labour market and a slow recovery in wages growth, which will ultimately support household consumption. A return to positive growth in our domestic economy will support a recovery in economic growth to around 3 per cent in 2018-19. The labour market is where adjustment in the economy is felt most. Many businesses and employees have been forced to restructure in order to stay competitive, and the subsequent increase in the number of people looking for work has created some spare capacity in the economy. ECONOMIC FORECASTS FOR WESTERN AUSTRALIA (PER CENT) Forecasts¹ 2015-16² 2016-17 2017-18 2018-19 Economic Activity Housing Consumption 1.4% 1.4% 2.2% 2.7% Dwelling Investment 1.3% -18% -5% 2% Business Investment -16.4% -28% -15% 3% State Final Demand -4.0% -7.1% -1.6% 2.5% Exports³ 5.9% 8% 7% 6% Imports³ -9.8% -12% 0.5% 2% Gross State Product 1.9% 0.5% 2% 3% Labour Market Since the December 2016 edition of Outlook, CCI s economics team has reviewed their forecasting capability and has developed two new econometric forecasting models which deliver new insights on how the WA economy is adjusting to the end of the resources investment boom. The two models complement each other and give CCI the ability to analyse different scenarios of shocks to the economy. Inflation 1.0% 0.8% 1.7% 2.1% Unemployment Rate 6.0% 6.3% 6.2% 6.0% Wages 1.9% 1.4% 1.8% 2.2% Footnotes: ¹ Forecasts are produced in terms of year-on-year growth, comparing four quarters of data to the previous four quarters of data. ² Actual outcomes as reported in the 2017Q1 ABS National Accounts data release. ³ Exports and Imports figures are for goods and services trade measured on a Balance of Payments basis. 2
ECONOMIC GROWTH The WA economy can be simply described as the sum of two parts: the domestic economy, which counts the value of goods and services consumed or invested in WA, and international trade, which captures the value of goods and services traded between WA, other states and countries. These two parts of the economy tell an important story the domestic economy grew off the back of record-high business investment in the construction of new resource projects, but as these projects completed construction, business investment slowed and operators have begun producing products for export. This is the shift from the construction to the production phase of the WA economy whereas business investment was once the major driver of economic growth during the resources investment boom, exports have now become the significant driving force of growth in our economy. CCI expects the economy to grow at just 0.5 per cent in 2016-17. As business investment and dwelling investment begin to recover over the forecast horizon and exports continue to grow, we expect the economy to grow by around 2 per cent in 2017-18 and 3 per cent in 2018-19. Our forecasts reflect the completion of major resources projects in the state (and a sharp fall in business investment) and signals the start of the operations phase of these projects (reflected in growing exports). BUSINESS INVESTMENT CCI believes that the WA economy is 88 per cent of the way down the business investment cliff (post-resources investment boom). The value of business investment in WA has continued to decline and is currently contributing around $40 billion in annual terms to the state s economy. This is around half the amount contributed to the economy at the height of the resources investment boom and is expected to continue to fall until 2018-19. A significant proportion of business investment in WA is comprised of major iron ore and LNG projects. Naturally, the completion of each major project coincides with a drop in business investment and an increase in exports (however, the increase in exports does not usually make up for the entire fall in business investment). Looking forward in 2017-18, the completion of the Chevron-operated Gorgon and Wheatstone projects will drive the fall in business investment. In the years following however, operations, maintenance and sustainment activities will result in a slight uptick in business investment. These service-type operations present a major opportunity for WA business. The North West Shelf LNG project which at one point accounted for more than one per cent of national GDP will maintain a steady flow of business investment through sustainment capital projects. The start-up of Shell s Prelude Floating LNG project, with its world-leading technology, will also represent a slight increase in business investment from Q3 2017. Overall, we expect business investment to reach the bottom of its fall within the next two years, with -28 per cent growth in 2016-17, -15 per cent growth in 2017-18, and 3 per cent growth in 2018-19. 3
LOW WAGES GROWTH IS CONTRIBUTING TO WEAK CONSUMPTION GROWTH. OVER THE 12 MONTHS TO MARCH 2017, WA WAGES ONLY GREW BY 1.2 PER CENT, DRIVEN LARGELY BY THE PRIVATE SECTOR. HOUSEHOLD CONSUMPTION Growth in household consumption has slowed down to just 1.3 per cent (in annual terms) in the March quarter 2017, in contrast to its peak of 5.5 per cent at the height of the resources investment boom. However, slow growth is still better than negative growth. Even in moderation, household income is still contributing to growth in our economy. The decline in business investment has meant that household consumption now accounts for over half of all domestic economic activity, compared with a share of around 40 per cent during the boom. Low wages growth is contributing to weak consumption growth. Over the 12 months to March 2017, WA wages only grew by 1.2 per cent, driven largely by the private sector. This level of wages growth is expected, given the current unemployment rate. However, as a sign of what could be to come in WA, the Australian economy and other advanced economies around the world are showing signs that wages growth is stubbornly low. In normal times, economists would expect workers to negotiate higher wages, given the level of the unemployment rate in other states and overseas. The most recent WA Super-CCI Consumer Confidence Survey (June quarter 2017) reports that consumer confidence is at a three-year high, with the average punter s expectation for the economy over the next year improving. Notably, the political environment, living costs, and global economic news are not weighing down on consumer confidence as much as in recent quarters. However, the survey results identify some downside risk to the outlook for household consumption personal employment circumstances, coupled with the risk of interest rate rises, could reduce disposable income for some households and their consumption. Overall, we expect household consumption growth to remain steady in 2016-17 at just 1.4 per cent. The unemployment rate is expected to ease further throughout 2016-17 and wages growth is expected to rise marginally to 1.8 per cent, providing scope for stronger household consumption. Further improvements in the labour market and the domestic economy are expected in 2018-19, with growth in household consumption forecast at 2.7 per cent. DWELLING INVESTMENT The first three quarters of data for dwelling investment in 2016-17 suggest that the final year figure will be weaker than in 2015-16. In the 12 months to March 2016, dwelling investment was worth $13 billion in WA, compared to just $10.6 billion in the 12 months to March 2017. CCI Economics is forecasting negative growth in dwelling investment in 2016-17 at -18 per cent. The outlook for dwelling investment still has some considerable downside risk. Population growth of just 0.7 per cent in annual terms is a key driver of weak demand in the housing market. Residential property prices have continued to fall in Perth, with a -3.5 per cent decline in the 12 months to March 2017, while the number of established dwelling listings in the Perth metro region continues to trend upwards with close to 15,000 dwellings on the market¹. The rental market is similarly over supplied, with the rental vacancy rate elevated at 6.5 per cent history would suggest the market has some adjustment to go before rents stabilise. Policy settings at both a state and national level also pose some downside risk to dwelling investment in WA. For example, a potential State Government foreign investor surcharge and the tightening of macroprudential regulatory settings at a national level (to curb financial stability concerns) could add to the pain in the WA housing market. Monetary policy settings also pose some risk to lending levels, with markets trading on the ASX expecting close to a 0.5 percentage point rise in the official cash rate within the next two years. On balance, recovering demand and oversupply in both the established dwelling and rental markets is likely to take at least another year to play out. CCI Economics expects the total value of dwelling investment to contract by another 5 per cent in 2017-18 before recovering in 2018-19 with 2 per cent growth. ¹ REIWA Market Update, March quarter 2017. 4
CCI ECONOMICS EXPECTS THE UNEMPLOYMENT RATE IN WA TO PEAK AT AN AVERAGE OF 6.3 PER CENT ACROSS 2016-17 INTERNATIONAL TRADE Exports from WA are forecast to grow significantly over the next three years. Growth in LNG exports driven by the start-up of the Wheatstone and Prelude projects production will drive export growth in the near future. Iron ore exports are expected to grow slightly in the near future, as there is some downside price risk that could drag down total iron ore export value. On the imports side, machinery and equipment for new business investment is expected to decline over the next two years as major construction projects slow or are completed. However, household consumption and the demand for imported goods will slowly recover over the forecast horizon. Overall, we forecast imports to have negative growth of -12 per cent in 2015-16 before returning to positive growth of 0.5 per cent and 2 per cent in 2017-18 and 2018-19, respectively. UNEMPLOYMENT The labour market has adjusted a great deal to the end of the resources investment boom. The unemployment rate continues to fall from its recent high of 6.8 per cent in November 2016 to just 5.5 per cent in May 2017. While the degree of spare capacity in the labour market has arguably increased over the past few years, the latest data suggests that the gap between the headline unemployment rate and measures of full employment could be narrowing. CCI Economics expects the unemployment rate in WA to peak at an average of 6.3 per cent across 2016-17. The unemployment rate is then forecast to remain above 6 per cent over the remainder of the forecast horizon, before beginning to decline slowly. The unemployment rate has acted as an effective shock absorber to the unwinding of the resources investment boom. Namely, part-time job creation to replace lost full-time jobs, a fall in the participation rate and a slowdown in population growth have helped keep the unemployment rate lower than it otherwise would have been. The degree of spare capacity in the labour market is also lower than it otherwise would have been. Part-time job creation noticeably increased over the period of the last two years. This has helped offset the number of redundancies in full-time jobs faced by those working in the private sector. CCI Economics estimates that if the rate of part-time job creation hadn t increased over the past few years, the unemployment rate would have peaked at 11.6 per cent. An additional 73,500 people would have been without any work at all. The participation rate measures the proportion of the working-age population who are either working or looking for work. The participation rate in WA has fallen from a high of 69.7 per cent in October 2012 to 67.6 per cent in May 2017. If the participation rate had stayed at its high of 69.7 per cent with up to an additional 70,000 people still in the workforce but not finding work then the unemployment rate would have peaked at 10.5 per cent. Overseas migration has slowed down dramatically and interstate migration is now showing a net flow of people leaving the state and going elsewhere. Population growth has slowed dramatically to just 0.7 per cent from a recent peak of 3.2 per cent in December 2012. If we had continued to grow at that peak rate, WA would now have around 275,000 additional residents. There are approximately 80,000 unemployed people in Western Australia, so slow population growth has certainly kept the unemployment rate lower than it otherwise would have been. WAGES AND INFLATION Wages growth has been weakening over the past few years, from a high of 4.8 per cent in June 2012 to just 1.2 per cent in March 2017. The trend in Perth inflation closely follows the movement in wages growth over the same time period. Inflation in Perth has been weak remarkably weak for a city that was known for $7 flat whites during the boom. Wages growth in WA is expected to come in at just 1.4 per cent in 2016-17, with inflation of just 0.8 per cent. As spare capacity in the labour market narrows with increased economic activity, wages growth is expected to pick up to 1.8 per cent and 2.2 per cent in 2017-18 and 2018 19, respectively. Inflation is expected to reflect the increase in wages growth, with a 1.7 per cent overall increase in the price level in 2017-18 and 2.1 per cent in 2018-19. 5