BCEC Quarterly Economic Commentary – June 2019

This Western Australia Quarterly Economic Commentary analyses the most recent data on economic and social indicators for WA, as at Q2 2019.

This quarter we see that falling private sector investment continues to drag the WA economy into negative growth territory, with SFD (trend) declining by 0.3%. Declines in SFD would be worse if not for the continued protection from positive growth in public consumption expenditure and public investment.

Key findings from this edition include:

WA’s economic challenge – stimulating economic growth, while controlling public debt

As previously noted here, the WA Government must be commended on their management of the public finances, with Moody’s providing an upgrade in ratings from Aa2 to Aa1. This coincides with deficits that push WA’s debt-revenue ratios back to 50%. However, weak economic growth continues and presents a conundrum for the Government – debt repayment versus further economic stimulus packages supporting future growth.

The State government’s revenue position has certainly improved, with unexpectedly high iron ore prices, peaking at over US$125 per tonne in early July, from US$69 at the start of 2019, adding to the GST windfall. However, with iron ore prices already showing a decline with production again likely to ramp up in Brazil, and larger iron ore stocks accumulating in China, important decisions remain.

Is the cocktail of RBA interest rate cuts and Government tax reforms enough to stimulate consumer spending?

The retail sector is hurting, with not a week going by without media reports of another small business in the retail sector going into administration. Many are well known brands, part of the WA and Perth fabric. A prolonged sluggishness in household consumption is taking its toll, even on well established businesses, as is competition from the larger players in the sector. And this is a phenomenon present at both a Perth and regional level. In a recent ABC Goldfields interview, I discussed some of the underlying reasons as to why small businesses are hurting.

With a ‘new’ Federal government in place, one eye will remain steadfast on the impact of the recently approved tax reforms on household consumption expenditure. The other eye will assess how the RBA’s interest rate cuts will make their way into the economy.

We still have some way to go before confidence returns to the property market

For some time now, we’ve been highlighting weaknesses in the construction and real estate sectors, both in WA and nationally. Multiple red flags for the property and construction markets are raising concerns across Australia. The national Residential Property Price Index (RPPI) declined sharply in the two quarters to March 2019, while property prices in WA are now trending towards 2012 price levels.

While recent RBA rate cuts may incentivise additional house purchases to take advantage of lower property prices, there is still a little way to go before confidence returns to the market.