Deloitte joins WA doomsayers

Advertisement

From The West Australian:

The WA economy is facing an even deeper downturn, one of the nation’s leading analysts has warned, with the State’s finances at grave risk.

Deloitte Access Economics, in its quarterly report on the economy that will be a wake-up call for the Barnett Government and Mark McGowan’s ALP, has slashed every key forecast for the State’s economy

WA is tipped to experience barely any growth in the next two years. The domestic side of the economy is expected to contract for a third consecutive year.

The number of jobless is tipped to climb, private investment will contract, the housing sector will go backwards and the number of people moving into WA will slow.

“Times are tough and chances are they’ll get tougher,” Access director Chris Richardson said.

Many of the company’s key economic forecasts are weaker than those underpinning the State Budget, including wages growth, inflation, population growth and overall activity.

The big issue is the looming end to “giant” LNG projects that are going to be replaced by only “pygmy” work elsewhere.

Mr Richardson said those who thought commercial construction would help protect the State needed to “have a Bex and a lie- down”. The entire pipeline of work was worth $17 billion or a fifth of the combined Gorgon and Wheatstone LNG projects.

“The office vacancy rate is already high and is set to get much worse over the next year as companies operating in the West strive to cut costs,” he said.

Where does one begin? At the top I suppose. State final demand has zero chance of being in the positive for the next two years:

ScreenHunter_10883 Dec. 10 16.46
Advertisement

Unemployment is already at 6.53% in trend terms – the highest reading since January 2002 – and is not in any danger of flattening out to meet the Budget forecast of 6.5%:

ScreenHunter_10881 Dec. 10 16.01

Then there’s wages growth in Western Australia, which came in at just 1.98% in the year to September 2015 – already below the new outlook as well and declining:

Advertisement
ScreenHunter_10541 Nov. 25 09.56

The iron ore price is already trading well below $46 and 2016/17’s $42 should be $30 and 2017-19 should be $20. Somehow Treasury has also contrived to raise its volumes outlook, even though they are going to fall sharply. At least the exchange rate is also too high offering some insurance.

Then we come to the population growth outlook of 1.5% which is also above where it is today at 1.4% and not exactly trending as desired:

Advertisement
ScreenHunter_10540 Nov. 25 09.51

Then there are the sectoral outlooks:

Capture

Household consumption is expected to rebound:

Advertisement

In 2014-15, growth in household consumption moderated to 1.1%, below forecast growth of 1.5% at Budget. Excluding the GFC period, this was the lowest rate of growth in 25 years and well below national growth of 2.5%. Discretionary spending6 has been particularly weak, detracting from consumption growth for the second consecutive year. The larger than expected moderation in consumer spending in 2014-15, combined with a more moderate outlook both across the broader domestic economy and for population growth, has flowed through to lower forecast growth in household consumption across the forward estimates period. Household consumption is expected to increase by 1.5% in 2015-16 (down from 2.75% at Budget), before lifting gradually across the forward estimates to reach 3% by 2018-19 (see figure below). This is consistent with a slower anticipated recovery in domestic economic activity and labour market conditions. Consumption per person, having fallen in 2014-15 (the first fall since the GFC), is expected to gradually recover across the forecast period.

Dwelling investment to stay at a permanently high plateau:

Following strong growth of 11.7% in 2013-14, total dwelling investment moderated to 4.1% in 2014-15 (slightly above the Budget forecast of 3.25%). The pace of growth in new dwelling construction slowed over the year and expenditure on ‘alterations and additions’ contracted for the fourth consecutive year.

In 2015-16, total dwelling investment is forecast to increase by a modest 2.25% (marginally higher than the 2% forecast at Budget). Although the pace of new dwelling construction is slowing, the level of expenditure required to move the current stock of dwellings under construction (the third highest level on record in the June quarter 2015) to completion is expected to support slightly higher growth in 2015-16 than previously forecast. In 2016-17 and 2017-18, total dwelling investment is projected to decline more sharply than forecast at Budget. While it is anticipated that a gradual recovery in expenditure on ‘alterations and additions’ will provide some support for activity, this is expected to be insufficient to offset the stronger than projected declines in new dwelling investment. This reflects a softer outlook for key drivers of new housing demand since Budget, including population, employment and wage growth. This weakening of housing demand has already begun to flow through the building pipeline, with completions outpacing commencements (in the June quarter 2015) for the first time in three years and the number of building approvals declining by 5.8% in the 12 months to October 2015.

Here is the history of housing starts:

ScreenHunter_10544 Nov. 25 10.05

Tell me that they are going to fall just 6% in the next two years then grow again. They are going to halve! It is already happening:

Advertisement
Capture

Business investment is expected to gently fall away like snow flakes before rebounding strongly:

Business investment fell by 12.3% in 2014-15. This is a larger decline than the 10.5% fall estimated at Budget. It is also the second consecutive contraction in investment since it peaked at a record level of $78.7 billion in 2012-13. Business investment is expected to continue to fall at a faster rate across the forecast period, reflecting a more subdued outlook for both resources and non-resources investment since Budget. Investment is projected to decline by 12.5% in 2015-16 before falling by an average of around 10% per annum across the forward estimates, double the average fall of 5% per annum at Budget (see figure below). The revised profile reflects the absence of major new resource project commitments since Budget. In addition, changes in the expected wind down of the remaining capital expenditure on LNG projects has contributed to a larger fall in 2016-17 than previously expected. Declines in both commodity prices (particularly iron ore and oil prices) and exploration expenditure have also reduced the likelihood of prospective resource projects emerging over the forecast period. Weaker domestic economic activity (including softer growth in consumer spending) has weighed on the outlook for non-resources investment across the forecast period. This is consistent with further annual average falls in building activity and approvals since Budget, and a rise in the central business district office vacancy rate (to 19.6% in the September quarter 20159 ). The latest Westpac – CCI Survey of Business Expectations shows that anticipated investment expenditure remained at record low levels in the September quarter 2015, with 44% of businesses planning to reduce their investment expenditure over the next 12 months. The revised forecasts imply that the value of investment will fall to around 13% of forecast GSP by 2018-19. While this is down from the long-run average share of around 16% forecast at Budget, it remains above the long-term share for the period up to 2004-05 of around 11%. Overall, the level of investment in Western Australia is expected to fall from $62.5 billion in 2014-15 to around $39.8 billion by 2018-19 (its lowest level since 2006-07), a total decline of around $23 billion (or 36%).

Advertisement

$40 billion in 2018/19 is pure fantasy. It will be half of that. There is nothing to take up from collapsing mining:

ScreenHunter_10538 Nov. 25 09.41
ScreenHunter_10539 Nov. 25 09.46
Advertisement

Nearly all of the assumptions in the Emperor Barnett’s Budget were debunked as it was published.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.