The recessionary horror of the Western Australian economy

Wed, 28 Sep 2016  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/the-recessionary-horror-of-the-western-australian-economy-002509793.html 

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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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