The recessionary horror of the Western Australian economy

Wed, 28 Sep 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: 


The recessionary horror of the Western Australian economy

Western Australia is in a deep and increasingly nasty recession. There are no signs that the economy is near a bottom which is disconcerting. The plunge in mining investment and the slump in commodity prices have hit WA hard and the economic scorecard is, quite simply, miserable.

During 2008, the unemployment rate in WA fell to a stunning low of 2.3 per cent. After a temporary rise with the GFC, the unemployment rate was 3.5 per cent during 2012. This was the lowest in Australia by a large margin. Most recently, unemployment spiked to 6.3 per cent which is now third highest in Australia, behind only South Australia and Tasmania. Since the middle of 2015, there has been no increase in employment levels.

State final demand, which is effectively GDP excluding net exports, peaked in September 2012 and since then, has been trending lower. From that peak, State final demand has slumped 13.2 per cent. While exports of iron ore and other commodities are strong and adding to activity in WA, from the perspective of private and public sector spending and investment, the economy is going backwards.

Consumers in WA are in a funk, with the value of retail sales lower now than in November last year. The number of dwelling approvals has fallen by 40 per cent from the 2014 peak which is undermining construction activity.

The housing market is depressed. Since peaking in early 2015, house prices have fallen by over 10 per cent and they show no signs of bottoming. The rental vacancy rate has risen to its highest rate in over 25 years with a glut of property. As a result, dwelling rents are falling and over the past year, rents have fallen by 5 per cent.
This is the first time since the early 1990s recession that rents have actually fallen.

This check-list of economic news points to the WA economy in dire straits. With the domestic economy shrinking, the unemployment rate is set to rise further. While ever this is happening, house prices are likely to fall further which risks creating a deflationary spiral of falling economic activity, further rises in unemployment, further house price weakness and so it goes.

It is not clear what can be done in the near term to arrest the decline. Interest rates are set by the RBA for the country as a whole and WA is being held back with monetary policy being too tight. So too for the Australian dollar which, for WA, is too high even though it is well down from the peak levels above parity.

The State government could use fiscal policy to kick-start the economy, but its inept handling of the budget and the economy during the upswing in the commodity price boom is constraining its ability to borrow and invest. It’s shoddy credit rating means it has to pay a higher interest rate than soundly rated borrowers.

It looks like WA will have a tough year ahead with every possibility that the unemployment rate will hit 7 per cent, or more, and that house prices will register a peak to trough fall of somewhere between 15 and 20 per cent.

Oh now the once mighty have fallen.

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My house price bet with Tony Locantro - an update

Mon, 01 Apr 2019

This article first appeared on the Yahoo Finance web page at this link: 


My house price bet – I’m very happy and getting ready to collect

I recently made a bet with Tony Locantro, Investment Manager with Alto Capital in Perth on the extent to which house prices would fall over the next three years.

Just to reiterate, the bet centred on Locantro’s view that prices would drop 35 per cent or more by the end of 2021 from the peak levels in 2017, a forecast that looked absurdly pessimistic given the raft of factors that influence house prices over the course of years.

For Mr Locantro to win the bet, house prices measured by the Australian Bureau of Statistics on a quarterly basis in either Sydney, Melbourne or for the average of the eight capital cities would need to fall by 35 per cent or more from the peak levels by the time the December quarter 2021 data are released. The ABS released the latest residential property price data last week which presents an opportunity to see how the bet is unfolding, admittedly with three years to go until it is settled.

As everyone knows, house prices are falling in most cities, reversing part of the boom over several decades.

Get ready for a cash rate cut in April

Mon, 25 Mar 2019

This article first appeared on the Yahoo Finance website at this link:


Get ready for a cash rate cut in April

The data is in and it is compelling.

The Australian economy is faltering and the risk is that it will weaken further if nothing is done to address this decline.Not only has there been recent confirmation of a per capita GDP recession – that is, on a per person basis the economy has been shrinking for two straight quarters – but inflation is embedded below 2 per cent, wages growth is floundering just above 2 per cent, house prices are dropping at 1 per cent per month and dwelling construction is in free fall.

Add to this cocktail of economic woe an unambiguous slide in global economic conditions, general pessimism for both consumers and business alike and a worrying slide in the number of job advertisements all of which spells economic trouble.Blind Freddie can see that there is an urgent need for some policy action. And the sooner the better.For the Reserve Bank of Australia, there is no need to wait for yet more information on the economy.

It has been hopelessly wrong in its judgment about the economy over the past year, always expecting a growth pick up “soon”. Instead, GDP has all but stalled meaning that inflation, which is already well below the RBA’s target, is likely to fall further.In short, no. It is not like a 25 basis point interest rate cut on 2 April and another 25 in, say, May or June will reignite inflation and pump air into a house price bubble.

Such a claim would be laughable if there are any commentators left suggesting this.