The run of outs is over: Western Australia’s domestic economic recession of almost four years is over, with State Final Demand rising in annual terms for three quarters in a row.
The March quarter National and State Accounts data, released by the Australian Bureau of Statistics today, showed Western Australia’s State Final Demand was broadly unchanged on the quarter in March, to stand 1.4 per cent higher over the year. This marks the third straight quarter of annual expansion, which ended a run of 17 straight quarters of decline from June 2013 to June 2017 (Chart 1).
Through nine months, Western Australia’s State Final Demand stands at $153.2 billion, up on the $151.5 billion in the same nine-month period last financial year. This implies the State’s domestic economy will grow by at least one per cent over the course of this financial year – barring a shock decline in the June quarter.
In line with our update last Friday, the ABS data confirms the worst of the slide associated with the end of the resources investment boom has passed. Indeed, there has been a surprise surge in private sector machinery and equipment purchases, which grew by 27.5 per cent in annual terms in the March quarter (Chart 2).
Without additional detail it’s difficult to determine the driver of the surge, but we would suggest it is likely to be driven by the need for major mineral and energy companies to continue to invest in their operations. A number of ACIL Allen’s clients in these industries are talking to us about the need for a continued focus on productivity and innovation, which is leading to renewed investment in technologies like automation.
Consumer spending – the largest component of the economy – continued to grow a little ahead of the State’s population growth, rising 1.7 per cent in the year to March. This is up from the sub-one per cent rates experienced for most of the last financial year, in another sign the State’s domestic economy is picking up (Chart 3).
A pick up in consumer spending is a welcome development for the State. Wages growth has been sluggish for some time, in line with volatile labour market conditions and the focus by both public and private sectors on containing labour costs. An improvement in consumer spending suggests households are beginning to feel more confident about their own finances and employment prospects.
The cyclical decline in the State’s housing construction sector also appears to be slowing, with total dwelling investment (new builds plus alterations and additions) rising for the second straight quarter in trend terms (1.3 per cent in March, after a 1.1 per cent rise in December).
However, this may prove to be a temporary reprieve, with lead indicators of housing construction (dwelling approvals and new dwelling unit commencements) suggesting we’re not yet at the bottom (Chart 4).
Public sector activity in the State has also lifted a notch or two in recent months, with the combined spending of Local, State and Commonwealth Governments in Western Australia rising 3.2 per cent over the year. This may reflect the shift to transport projects as a driver of State Government investment, with State level General Government investment rising seven per cent year on year.
One very important component of the State’s economy that isn’t tracked in the quarterly State Accounts is the external sector (exports and imports). However, today’s release of exports data from the ABS confirms this, with Western Australian companies exporting over $126 billion of merchandise in the last 12 months (an increase of 7.7 per cent compared to the previous 12 months) (Chart 5). This accounted for over 40 per cent of Australia’s exports over the same period.
These figures suggest the State recorded a merchandise trade surplus of almost $87 billion over the year to April, compared to a $9 billion surplus for the Australian economy at large.
Nationally, the Australian economy burst out of the blocks to begin 2018, with seasonally adjusted GDP increasing by just over one per cent on a quarter-on-quarter basis during March – the highest rate of quarterly growth since December 2011. In year-on-year terms, the Australian economy increased in size by 3.1 per cent – a two year high.
The underlying drivers of growth were exports and general government expenditure. These two items contributed 0.8 percentage points towards the final quarterly growth figure of one per cent. Meanwhile, the private gross fixed capital formation and household expenditure categories – the two largest components of the domestic economy – contributed just 0.4 per cent between them.
On an industry basis, unsurprisingly the export-driven mining sector was the strongest contributor to GDP growth (0.2 per centage points) along with the healthcare and social assistance sector (0.2 per centage points).
That mining exports and mining activity more generally were the two biggest drivers of national economic growth suggests the industry is also making a significant contribution to the Western Australian economy.
Overall, the data confirms ACIL Allen’s view that the State’s economy has stabilised following the end of the resources investment boom. We would expect to see further signs of improvement in both consumer spending and the labour market as the domestic economy continues to adjust to its new normal. And as we raised last week, there is the prospect of a fresh wave of capacity-maintaining investment projects to hit the State in the coming years.