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Archive for December, 2013

Will the mining boom crash Western Australia?

Posted by cegan on December 12, 2013

One of the big discussion points of 2013 has been the decline in mining investment in WA. Earlier this year there was statements about WA being in recession due to the reduction in mining capex from the previous years, but it discounts the overwhelming strength of the WA economy when the focus is so narrowly focussed on one area of the state’s economy.

The national unemployment rate of 5.8% today stands in contrast to Western Australia’s unemployment rate is 4.4%. Participation Rate the highest of the states at 67% and this is when the mining cycle has transferred from the construction to the operational phase.

The crash, the unemployment has not occurred.

Why is this the case?

Economies are in reality complex, they can’t be predicted by one simple sector based report. As WA’s mining capex reduced, interest rates were reducing because of continued weakness on the eastern seaboard. So the stimulation of the interest rate cuts have been significantly stronger in an economy that never had weak growth that the rest of Australia has had. As mining capex has reduced, interest rates have gone down and money is being expended in different sectors of the state.

First Home buyers getting loans in Western Australia are 23.1% of the market compared to the 12.6% national average. There are higher wages, land being supplied to market and inflation at the national average. Just like Germany has benefited from recession in Greece, Western Australia has benefited from recession in Tasmania and South Australia.

Inflation pressures?

Surprisingly many economists view that inflationary pressures begin at unemployment levels below 5% and thus the need for interest rate rises. This has not been seen in WA because of strong population growth and significant weakness in other job markets. So because it has weak economies in other states, upward pressure on wages and costs have been constrained.

The housing sector which was seen as crucial to support economic growth has only stimulated Western Australia and New South Wales .Dwelling commencements in both states grew 31% in 2012/13, but in the rest of the country it grew by only 1%

Interest rate cuts have not had any impact on the vital housing construction industry other than in two states, but the strength of recovery in both states which have the highest wages in the country is such that future interest rate cuts will be limited.

Declining mining investment has come at the same time as very weak economic fundamentals in much of eastern Australia, thus significant stimulus for Western Australia. Its unemployment rate is thus below full employment

So the predictions of recession in national newspapers in Western Australia, does not reflect what happened when the mining investment stage finished. It has weak economic performance in much of Australia to thank for this. For the media, just because Western Australia has mining, economies don’t always work in boom/bust cycles. They are interlinked to forces at a regional, national and global level.

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