The Western Australian economy has bounced back from the lows of 2020. But 2021 still holds plenty of challenges.
The global vaccination rollout is well underway, supporting a resurgence in consumer and business confidence. Australia risks economic costs if it fails to catch up to other advanced economies in its vaccination program, potentially missing out on benefits from a resumption in international travel and services trade – but so far, that hasn’t held back Australia’s roaring economic recovery.
The Western Australian economy showed great resilience through the pandemic, contracting by an estimated 0.2 per cent in the 2020 calendar year – at a time when many advanced economies saw double-digit contractions. Nonetheless, we see plenty of capacity for the State to grow in 2021, with forecast growth in real gross state product (GSP) of around 5 per cent.
Households bore the brunt of the downturn in 2020, as a mix of declining confidence, job and income losses and physical restrictions drove a collapse in consumption. But many of those factors have moderated or reversed altogether, with consumer confidence indexes at multi-year highs, underpinning forecast 4.9 per cent growth in WA household consumption in 2021.
Net international exports are expected to be the largest contributor to State growth in 2021, driven by growth in commodity export volumes and despite a bounce back in goods imports. The public sector will also continue to play an outsized role in economic growth in 2021 as the State rolls out a substantial infrastructure investment program, before trailing off in 2022. But as business conditions improve, we see growth in private investment more than offsetting the winding-back of public sector support through 2022.
The State’s remarkable recovery is nowhere better demonstrated than in the labour market. The unemployment rate has fallen below 5 per cent, and the number of job vacancy advertisements has more than doubled over the last 12 months.
The spike in labour demand in certain industries and occupations could mean that the State’s next labour market challenge is addressing a shortage of skills, rather than an excess supply of workers – especially in the mining and construction industries. Unmet demand could bring about faster wage growth earlier than expected, and consequently, accelerate consumer price inflation in WA ahead of the national rate.
Inflation isn’t a concern just yet, with headline consumer prices in Perth growing only around 1 per cent over the year to March 2021. But the risk of multispeed wage growth and consumer inflation will persist while labour market conditions continue to tighten.
That’s one challenge for the WA Government to keep an eye on. Another is how to put its State Budget surpluses to work over the next four years, as iron ore prices climb to all-time highs and send royalty revenues soaring. Prices won’t stay at these highs forever, with downside risks in both demand (from China) and supply (from Brazil) in the global iron ore market. The State must carefully balance pressure to ramp up spending with a need for discipline, to mitigate the risk of potential declines in revenue.
On many headline economic indicators, the State economy is back to where it was before COVID-19, or better. That masks distributional impacts, as many industries and cohorts wearing the pain of the pandemic more acutely. But many of the challenges facing the State in late 2019 / early 2020 are still there. Economic diversification is one of those challenges: The recovery has largely been aided by increasing our reliance on the mining industry and a temporary spike in construction activity and has exposed weaknesses in areas such as domestic manufacturing and exporting services beyond tourism and international education. There is plenty of work to be done to future-proof the State against the next COVID-style downturn.
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Matt leads the Deloitte Access Economic practice in Western Australia. He assists clients with macroeconomic forecasting, economic impact assessments, policy development, and market and industry reviews. Prior to Deloitte, Matt held roles with McKinsey & Company, Saha International and Arthur Andersen.
Noel is a Partner in Deloitte Access Economics’ Perth office. Noel leads Deloitte’s transport practice in WA, and has a focus on cost benefit analysis and business case development for major road and rail projects. Noel also advises clients on the quantification of economic impacts for major infrastructure projects and policy changes, and briefs clients on the macroeconomic outlook for the State along with key risks and opportunities.