20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA

 
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
20   WESTERN AUSTRALIAN
     INFRASTRUCTURE
18   REPORT
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
Aubin Grove Train Station and Russell Road
Upgrade. Photo courtesy of Georgiou Group
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
Civil Contractors Federation
Western Australia Branch
70 Verde Drive
Jandakot, WA 6164
Phone: (08) 9414 1486
Fax: (08) 9414 1496
Email: ccfwa@ccfwa.com.au
Web: ccfwa.com.au
Twitter: @CCFWA

BIS Oxford Economics Pty Ltd
Level 8, 99 Walker Street
North Sydney NSW 2060
Contact: Adrian Hart
Associate Director – Construction, Mining and Maintenance
Phone: (02) 8458 4233
Fax: (02) 9959 5795
Email: ahart@bisoxfordeconomics.com.au
Web: bis.com.au
Twitter: @BIS_OE

© November 2017 Civil Contractors Federation WA. All rights reserved.
This report has been prepared by Adrian Hart and Rubhen Jeya from BIS Oxford Economics. It has been prepared on
the basis of publicly available information. BIS Oxford Economics has relied upon and assumed, without independent
verification, the accuracy and completeness of all such information. It contains selected information and does not purport
to be all-inclusive or to contain all of the information that may be relevant to the Purpose. The recipient acknowledges
that circumstances may change and that this report may become outdated as a result. BIS Oxford Economics is under
no obligation to update or correct this report. BIS Oxford Economics, its related bodies corporate and other affiliates,
and their respective directors, employees, consultants and agents (‘Oxford Economics Group’) make no representation
or warranty as to the accuracy, completeness, timeliness or reliability of the contents of this report. To the maximum
extent permitted by law, no member of the Oxford Economics Group accepts any liability (including, without limitation,
any liability arising from fault or negligence on the part of any of them) for any loss whatsoever arising from the use of
this report or its contents or otherwise arising in connection with it. This report may contain forward-looking statements,
forecasts, estimates and projections. No independent third party has reviewed the reasonableness of any such statements
or assumptions. No member of the Oxford Economics Group represents or warrants that such Forward Statements
will be achieved or will prove to be correct. Actual future results and operations could vary materially from the Forward
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based may be reasonable. No audit, review or verification has been undertaken by the Oxford Economics Group or an
independent third party of the assumptions, data, results, calculations and forecasts presented or referred to in this report.
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
20              WESTERN AUSTRALIAN
                INFRASTRUCTURE
18              REPORT

Contents

20           WESTERN
Executive summary
                 INFRASTRUCTURE
                                AUSTRALIAN                                     6

18
1. WA economic     outlook                                                   10
                 REPORT
Outlook for the global economy
Outlook for commodity prices
                                                                              11
                                                                              13
Outlook for the Australian economy                                           14
Outlook for WA                                                               16
Need for an open policy conversation to drive sustainable long-term growth   18
Key risks to the WA economic outlook                                         20
2. WA infrastructure outlook                                                 24
Recent trends and outlook for construction activity                          25
State of play and outlook for infrastructure
and mining construction                                                      28
WA construction cost trends                                                  32
3. WA major projects (project value >$50 million)                            34
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
Executive summary

                              T
                                      his is the third WA Infrastructure Report published by the CCF WA in
                                      conjunction with BIS Oxford Economics research, forecasting and analysis.
                                      Western Australia’s civil construction industry continues to face myriad
                                      challenges as the WA economy transitions from the mining boom to more
                              balanced and sustainable growth.

                              Across Australia, the aggregate economic and construction story represents a balance
                              of what are highly imbalanced state markets. As the mining investment boom has
                              receded, economic and population growth has slowed sharply in the former resources-
                              focused boom states such as WA. Excess supplies of housing and commercial space
                              built up during and just after the boom will take time to unwind, deterring private
                              investment, while weaker state government balance sheets give less room to
                              manoeuvre for State-funded public investment.

                              By contrast, the lower post-boom Australian dollar has reinvigorated New South Wales
      Positive investment     and Victoria, with renewed growth in trade-exposed industries driving a new wave in
  drivers are providing a     private investment. Asset recycling coupled with stronger state government revenues
   boost to national civil    is also driving a boom in public investment in these states. Together these positive
construction activity but     investment drivers are providing a boost to national civil construction activity.
investment, construction
                              The positive news for contractors and suppliers to the civil construction industry in
   activity and economic
                              WA is that the worst is now behind us. Growth is rebalancing, and the construction
     growth are likely to
                              industry has taken steps to reduce excess capacity. But growth in demand and
remain soft in WA for the
                              construction activity is not expected to rise spectacularly either. Rather, investment,
           next two years
                              construction activity and economic growth are likely to remain soft for the next
                              two years in WA as the excess supply of housing and commercial space is gradually
                              absorbed and the State Government takes steps to improve budget finances.

                              Key findings
                              • Total construction work done in WA fell nearly 30 per cent or $14.4 billion during
 Total construction work
                              2016/17. The fall in oil and gas construction contributed nearly $8 billion of the
  done in WA in 2016/17
                              decline alone, but pipelines, other mining and heavy industry construction, residential
   was 40 per cent lower
                              building and non-residential building also fell. Total construction activity in 2016/17
 than the 2013/14 peak.
                              was 40 per cent lower than the 2013/14 peak.
   However, excluding oil
and gas construction, WA      • However, excluding oil and gas construction, WA engineering construction is
engineering construction      expected to rise through the next five years. Initially this growth will be focused in key
        is expected to rise   publicly-funded civil construction markets such as telecommunications, roads and
    through the next five     railways construction – where Commonwealth funding support is significant – but
                     years    will eventually extend into rising non-LNG mining and heavy industry construction
                              as commodity prices and depletions at existing mines underwrite the next round of
                              resources projects.

                              • The challenge will be to sustain WA public infrastructure investment beyond the
                              current wave of projects across transport and telecommunications. Publicly funded
                              civil infrastructure construction activity rose 7.7 per cent in 2016/17 to the highest
                              level since 2009/10, but is expected to fall again as large construction projects such as
                              the NBN rollout and the Forrestfield Airport Link wind down.

                              • Sharply falling total building and construction activity in WA in recent years – along
                              with the lost ‘multiplier’ benefits construction spending has on the economy – has
                              driven a record contraction in State final demand, a key determinant of employment.
                              While WA is now over the worst period of contraction, further falls in residential
                              building activity and other parts of the construction industry will keep growth in
                              demand and the broader economy soft.

6                                                                                   BIS Oxford Economics – CCF WA
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
•    Sharply falling total building and construction activity in Western Australia in recent years –
         along with the lost ‘multiplier’ benefits construction spending has on the economy – has
         driven a record contraction in State Final Demand, a key determinant of employment. While
         Western Australia is now over the worst period of contraction, further falls in residential building
         activity (and other parts of the construction industry) will keep growth in demand and the broader
         economy soft.

    • Falling
 • Falling       activity
            activity       across
                      across        building
                                building   andandconstruction
                                                    construction hashasimpact   on employment
                                                                          impacted    employment   in the   Western
                                                                                                        in the
        Australian   construction     industry.  In 2016/17,   average construction
 WA construction industry. In 2016/17, average construction employment fell 10.5     employment   fell 10.5 perper
                                                                                                                cent
        to 133,000  persons   – the  biggest single  year  decline since the 1990/91
 cent to 133,000 persons – the biggest single year decline since the 1990/91 national national recession.  Declining
        building
 recession.       activity in
              Declining       comingin
                            activity    years,  which which
                                          building,     tends to   be more
                                                                tends   to beemployment    intensive than
                                                                               more employment              the civil
                                                                                                         intensive
 than the civil construction segment, is expected to see a further 10,000 construction a
        construction   segment,   is expected   to  see  a further 10,000  construction jobs  put at risk, despite
        steady
 jobs put       outlook for civil construction work.
           at risk.

 Key indicators WA: State
           Key Indicators    finalAustralia:
                          Western  demand,     gross
                                             State FinalState product
                                                         Demand,       and Product
                                                                 Gross State engineering
                                                                                   and
 construction activity,  2014/15
                     Engineering    constantActivity,
                                 Construction   prices 2014/15 Constant Prices
                                           Source: BIS Oxford Economics, ABS data
                                                                                                          $ Billion
 20%                                                                                                          60
        WA Oil and Gas Work Done (RHS)                         WA Engineering Construction less Oil and Gas (RHS)
        WA SFD A%Ch                                            WA GSP A%ch
 15%                                                                                                          45

                                                                                                                        Growth in State final
 10%                                                                                                          30        demand – the sum of
                                                                                                                        household consumption,
                                                                                                                        government consumption
  5%                                                                                                          15
                                                                                                                        and investment, both
                                                                                                                        public and private –
                                                                                                                        has been very weak or
  0%                                                                                                          0
                                                                                                                        negative in recent years
        87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17e 19f 21f

 -5%                                                                                                          -15

-10%                                                                                                          -30
        Year ended June                                                    Source: BIS Oxford Economics, ABS data

Post-boom Policy Challenges
  Post-boom
Western           policy
          Australia       challenges
                    continues  to face a number of challenges as it transitions away from a boom driven
by resources investment to more balanced economic growth. Investment, and the construction activity
  WA continues to face multiple challenges as it transitions away from a boom driven
it generates, plays an important role in driving economic growth. In the short term, investment cycles have
 by resources investment to more balanced economic growth. Investment, and the
large impacts on economic growth – particularly via multipliers impacting the rest of the economy. In the
 construction activity it generates, plays an important role in driving economic growth.
medium to long term, investment cycles affect the sustainability of growth; that is, spending on new productive
capacity effectively
 In the short   term,creates the upper
                       investment       bound
                                     cycles      for large
                                              have   economic    growthonbefore
                                                           impacts         economictightening capacity
                                                                                          growth   – leads to
inflationary
 particularlypressures.
                 via multipliers impacting the rest of the economy. In the medium to long
 term, investment cycles affect the sustainability of growth; that is, spending on new
 productive capacity effectively creates the upper bound for economic growth before
 tightening capacity leads to inflationary pressures.

 The resources investment boom and bust has certainly impacted the wider economy,
 even in a resources-focused state such as WA. The mining boom wasn’t costless. The
 associated rise in the Australian dollar drove a structural change away from dollar-
 exposed industries, making room for the growth in industries servicing mining
 investment. The investment bust and the associated fall in the Australian dollar is
 reversing that structural change.

 As WA transitions its economy away from resources investment, new drivers for                                          As WA transitions from
 economic growth, competitiveness, productivity and rising living standards are                                         resources investment,
 needed. While a falling Australian dollar will help speed the structural adjustment in                                 new drivers for economic
 the economy, there is more which can be done through domestic economic policies. In                                    growth are needed
 particular:
   • Continuation of microeconomic reforms to boost competitiveness and productivity

 Western Australian Infrastructure Report 2018                                                                                              7
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
Executive Summary

                                • Reforming the fiscal tax/transfer system to minimise current inefficiencies,
                                  improve fairness and ensure that governments can fund rising recurrent
                                  expenditures (particularly in the areas of health and welfare) through the
                                  economic cycle
                                • Boosting productivity growth, which has been relatively weak over the past
                                  decade, through initiatives that encourage research and innovation, as well as
                                  investing in productivity-enhancing infrastructure.

                              While easy to state as a policy prescription, it is difficult in practice for the WA
                              economy to diversify away from its largest industry, mining. Structural change is hard
                              and, following years of new investment, the WA economy is even more concentrated in
                              mining, and less diversified, than ever before. However, WA needs its other industries
                              to step up to help sustain growth in demand and employment. The lower post-boom
                              Australian dollar – albeit flirting with US$0.80 – is a key ‘X factor’, immediately
                              boosting the competitiveness of trade-exposed industries that were suppressed during
                              the mining boom. But more could, and should, be done as a matter of public policy
                              to assist the WA economy in its transition towards more balanced and sustainable
                              growth.

     Public infrastructure    Infrastructure investment can play an important role here to support economic growth
    investment can play a     in the short term, but it can also play a more vital strategic economic role in the
  vital strategic economic    long term by building on WA’s core strengths – affordable housing, low energy costs,
      role in the long term   and close proximity to Asian markets – which can stimulate business investment,
    by stimulating private    employment and population growth. Used effectively, public infrastructure investment
investment that builds on     can stimulate private investment and can be an important tool in establishing sensible
       WA’s core strengths    policy settings that will help boost productivity and competitiveness in the long term.

                              A return to stable, if weak, economic growth from here provides an opportunity for
                              reassessing WA’s longer term economic plan and, in particular, looking at ways to
                              encourage and fund public and private investment that drives economic growth,
                              attracts population growth and stimulates employment. Without a coherent plan,
                              there remains a significant risk that future levels of investment will be inadequate, will
                              not capitalise on WA’s growth potential, and ultimately lead to a loss in productivity
                              and living standards. With public sector spending only making up a very small part of
                              the total WA economy, achieving a longer-term economic vision will depend crucially
                              on how the public sector can develop policies which stimulate private decisions on
                              where to invest and live.

                              The next waves of growth in the WA economy are already emerging. Now is the time to
                              get the policy settings right.

8                                                                                   BIS Oxford Economics – CCF WA
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
Sunset Heritage Precinct Site Services
Infrastructure Upgrade.
Photo courtesy of Tracc Civil

Western Australian Infrastructure Report 2018   9
20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
1. WA economic outlook

                              T
                                      he Western Australian economy suffered an unprecedented collapse in
                                      demand during 2016/17, with State final demand (SFD)1 down 7.4 per cent
                                      in the year, and a cumulative 15 per cent since the peaking of the resources
                                      investment boom in 2012/13. By contrast, the next weakest episodes in SFD
                              was the 4.3 per cent decline during the national 1990/91 recession, and a three-year
                              period of zero growth in SFD following the Asian Financial Crisis.

                              The good news is that the WA economy is now through the worst of the downturn
                              in demand, investment and construction activity. The flipside to this is that demand
                              growth will not recover quickly nor strongly from here. The reality is WA, ever
                              buffeted by the fortunes of the mining industry, has just been through the largest ever
                              boom/bust cycle in resources investment. Several years of flat growth in demand (and
                              albeit slightly stronger growth in gross State product, which includes net exports)
                              as the WA economy re-absorbs surplus capacity built up during the boom and
                              recalibrates public finances is the natural reality check to the previous cycle.
      It is important that    A return to stable, if weak, economic growth from here does, however, provide an
     public infrastructure    opportunity for reassessing WA’s longer term economic plan and, in particular, looking
investment should not fall    at ways to encourage public and private investment that drives economic growth,
below levels that threaten    attracts population growth and stimulates employment. It is important that, while
   long term productivity     investment should naturally be lower than during the boom years, it should not fall
                   growth     below levels that threaten long term productivity growth or the sustainability of
                              existing infrastructure and business assets.

                              Unfortunately, this is the risk facing sustainable productive infrastructure investment.
                              While public investment grew strongly in the 2000s, financed by ultimately
                              unsustainable growth in government revenues (and hence, consequently, debt), it
                              slumped by 15 per cent over 2014/15 and 2015/16. Growth has resumed in 2016/17,
                              with much riding on the Commonwealth Government’s financing of the NBN rollout, as
                              well as key road and rail projects, to drive this result. Long-term projections of public
                              investment contained in the 2017-18 State Budget suggest falling public infrastructure
                              investment towards the end of the decade.
Following the investment
    of hundreds of billions   While easy to state as a policy prescription, it is difficult in practice for the WA
         of dollars in new    economy to diversify away from its largest industry, mining. Structural change is
     resources assets over    difficult. If anything, following the investment of hundreds of billions of dollars in
  the past decade, the WA     new resources assets over the past decade, and surging mining exports as these
    economy is even more      assets move to their production phase, the WA economy is even more concentrated in
  concentrated in mining,     mining, and less diversified, than ever before.
 and less diversified, than
               ever before    However, WA needs its other industries to step up to sustain growth in demand and
                              employment. The lower post-boom Australian dollar (albeit edging back to US$0.80) is
                              a key ‘X factor’, immediately boosting the competitiveness of trade-exposed industries
                              that were suppressed during the mining boom, such as agriculture and manufacturing,
                              as well as services such as tourism and education. But more could, and should, be done
                              as a matter of public policy to assist the WA economy in its transition towards more
                              balanced and sustainable growth.

                              1. According to the Australian Bureau of Statistics’ Australian System of National Accounts: Concepts,
                              Sources and Methods (Cat. No. 5216.0, 2015, pp481-482), state final demand (SFD) is the aggregate
                              level of final consumption expenditure and gross fixed capital formation within a state over a
                              specified period of time. It equals household final consumption expenditure (HFCE) plus government
                              final consumption expenditure (GFCE) plus gross fixed capital formation (GFCF). In simple terms,
                              SFD is the sum of private and public consumption and investment within a state, and is a measure of
                              demand in a state economy.

10                                                                                           BIS Oxford Economics – CCF WA
Infrastructure investment can play an important role here to support economic
growth in the short term, but it can also play a vital economic role in the long term by
building on WA’s core strengths – affordable housing, low energy costs, and proximity
to Asian markets – to stimulate business investment, employment and population
growth. Used effectively, public infrastructure investment can stimulate or “crowd in”
private investment in trade-exposed industries benefiting from the lower dollar and
can be an important policy tool to help boost productivity and competitiveness in the
long term.

The key points to WA’s economic outlook include:
                                                                                             World GDP is predicted
  • Despite a range of risk factors (China, North Korea, US, Brexit), global economic
                                                                                             to grow at an average of
     growth is predicted to strengthen over the next two years, providing support to
                                                                                             3.5 per cent over the next
     the WA economy. Indicators currently point to robust and stable activity in the
                                                                                             five years
     world economy, with world GDP predicted to grow at an average of 3.5 per cent
     over the next five years.
  • The Australian economy, nationally, has weathered the worst of the resources
     investment bust, but its legacy will live on in resource regions that are now heavily
     oversupplied in terms of housing and commercial/industrial space. While further
     declines in mining investment are still to come as the $200 billion LNG investment
     boom moves to completion, the worst is over.
  • Unsynchronised investment cycles and slow structural change are keeping the              In Australia, patchy
     Australian economy soft. This is not a steady state economy, with large variations      growth will likely
     by state and industry. Private investment will continue to fall as the recent           continue through to the
     residential building cycle unwinds, while public investment is increasing. Patchy       end of the decade before
     quarterly growth figures will likely continue through to the end of the decade          non-mining business
     before non-mining business investment builds momentum sufficiently to drive             investment builds
     stronger growth. The resources investment boom was a massive distraction for            momentum sufficiently to
     the Australian economy, driving a process of structural change (through the high        drive stronger growth
     dollar) to service mining regions, production and exports. Now, with a lower
     dollar, the challenge is to rebuild trade-exposed industries decimated during the
     boom. This process has only just started.
  • In WA, structural adjustment is more difficult and will take longer, with the
     consequence that growth in domestic demand (SFD) and the broader economy
     (GSP) will be constrained well below long-term averages until the end of the
     decade. While the worst of the downturn in investment has passed, further falls
     are expected over the next two years as the mining investment bust reaches a
     trough, as residential and non-residential building moves lower, and as growth
     in infrastructure investment is mixed. This environment, combined with much
     stronger growth in investment and construction in the eastern states, is likely to
     pose challenges for local construction contractors and other market participants
     before a return to stronger growth in investment and the broader economy at the
     end of the decade.

Outlook for the global economy
During the coming structural readjustment, the Australian and WA economies are
being supported by a relatively positive global economy. Despite several well-known
risk factors (conflict in North Korea, Chinese financial stability, US and global trade
policies), forward indicators point to robust and stable activity in the world economy.
Reflecting a boost in relatively broad-based support from global trade, world GDP
growth is anticipated to increase this calendar year and next, before moderating
slightly. The picture across countries and regions is mixed, but overall positive for the
Australian and WA economies, with relatively stronger growth expected amongst key
trading partners.

Although growth has slowed since 2010, emerging economies still posted growth of

Western Australian Infrastructure Report 2018                                                                      11
WA economic outlook

                               4.2 per cent in calendar 2016. Declines in oil prices and more hawkish signals from
                               central banks in advanced economies may worsen the external backdrop for some
                               emerging economies, driving growth lower.

                               We predict growth in developed economies – at 2 per cent in calendar 2016 – will pick
                               up to around 2.5 per cent by calendar 2018 and 2019. Importantly, Australia’s trading
                               partner growth (weighted by exports share) will grow at a faster rate over the next
                               five years, due to the high weighting of the relatively fast-growing economies of China,
                               East Asia and India in Australia’s export mix.

                               In China, GDP growth has moderated in recent years from pre-GFC rates of around
Chinese economic growth        10 per cent, partly reflecting efforts to rebalance the economy towards household
 is easing as it transitions   consumption. Chinese economic growth is expected to soften gradually from 6.7
       to a demand-driven      per cent in calendar 2016 to 5.2 per cent by 2022. China’s real GDP growth is easing
                   economy     as the country continues its transition to a demand-driven economy amid further
                               urbanisation, demographic changes and weaker growth in investment.

                               Japan’s GDP is forecast to grow by 1.4 per cent in calendar 2017 and by a similar rate
                               in 2018 as improving global demand and a weak yen support growth in exports and
                               business investment. Moreover, fiscal and monetary policy will remain helpful. Given
                               solid employment, we expect domestic demand to become an increasing driver of
                               growth.

                               Economic growth in India is expected to be just shy of 7 per cent in 2017.
     India will outperform
                               Demonetisation and banking sector stresses are weighing on growth. But, the Indian
     other large economies
                               economy is on the mend and will outperform other large economies including China,
                               due to a continued pick-up in consumption, higher infrastructure spending and a
                               reasonable outlook for exports.

                               Despite the stronger global environment, growth in the United States remains
                               constrained at around 2 per cent. US economic growth is forecast to be 2.2 per cent in
                               calendar 2017, accelerating to 2.4 per cent in calendar 2018. The combination of solid
                               increases in employment and moderate wage growth will drive household income,
                               consumer spending and residential investment. Business investment is forecast to
                               accelerate, driven by improving domestic demand and export gains from a stronger
                               global climate and rebounding energy sector activity.
    US President Trump’s       The uncertainty surrounding the likelihood, timing and magnitude of President
 proposed fiscal stimulus      Trump’s policy proposals explain why he is seen as the greatest upside and downside
       measures have the       risk to US and global growth in the short term. Political uncertainty represents a
potential to boost growth      downside risk to business expansion. Trump’s proposed fiscal stimulus measures –
               from 2019       especially those relating to large civil infrastructure projects – have the potential to
                               boost growth from 2019, given the long lead times in getting major infrastructure
                               projects ‘shovel-ready’ from the planning stages to commencement. Passing of
                               legislation, notably complex tax reforms, will also take time. Nevertheless, stronger US
                               economic growth is expected to be tempered by the Federal Reserve raising interest
                               rates towards more ‘normal’ monetary policy settings, and to ward off inflationary
                               pressures from easing fiscal policy. This tightening cycle also presents a risk for the
                               international economy; emerging economies potentially face the risk of rising capital
                               outflows as investors rebalance portfolios and shift balances to higher returns on
                               offer in advanced economies. Emerging economies may need to raise rates – higher
                               than what would be typically warranted by domestic circumstances – to prevent the
                               destabilisation of capital outflows, falling asset prices and weaker confidence.

                               Encouragingly, the Eurozone is expanding at the fastest pace since the global financial
                               crisis. Export conditions are improving, investment is recovering, and weaker inflation
                               and strong consumer confidence and employment are increasing household spending.
                               However, the recent rise in the euro is likely to have an adverse impact on exports in
                               the near term.

12                                                                                   BIS Oxford Economics – CCF WA
strong consumer confidence and employment are increasing household spending. However,
            the recent rise in the euro is likely to have an adverse impact on exports in the near term.
FigureFigure
       1.1: Economic   growth
             1.1: Economic     byby
                           Growth global
                                    Globalregion
                                           Regionand Australia,Calendar
                                                 and Australia, calendar  years
                                                                        Years

       Annual growth in Real GDP
 6%

 4%

 2%

 0%
       89     91     93    95    97    99      01       03   05    07    09     11    13    15    17    19

-2%

              World         OECD            Australia
-4%
      Year ended December                                    Source: BIS Oxford Economics, OECD, Consensus

Outlook for Commodity Prices

Improvements in global economic conditions have – in conjunction with international policy
developments – also helped drive a recovery in commodity prices through 2016/17. This has
Outlook
had          fornegative
    positive and commodity
                         impacts onprices
                                     the Australian economy.

On  the one hand, in
Improvements        higher   prices
                        global      have underpinned
                                 economic              higher-than-anticipated
                                              conditions  have – in conjunctionmining industry
                                                                                    with       profits,
                                                                                         international
royalties, exploration activity and helped accelerate development of the next round of mining projects.
policy developments – also helped drive a recovery in commodity prices through
On the downside, higher commodity prices (in conjunction with delays to the interest rate tightening
2016/17. This has had positive and negative impacts on the Australian economy.
cycle in the US) has also driven an appreciation of the Australian dollar towards (and above)
US$0.80,
On the one which  is likely
               hand,        to have
                        higher       a contractionary
                                 prices               impact onhigher-than-anticipated
                                         have underpinned       other trade-exposed industries, slowing
                                                                                            mining
the structural
industry       readjustment
            profits,            needed
                       royalties,       in the economy
                                    exploration         to achieve
                                                  activity         more accelerate
                                                           and helped    balanced growth.
                                                                                     development
of thefor
Prices   next
           mostround    of mining
                  resource            projects.
                             commodities         On the
                                            recovered     downside,
                                                       from              higher
                                                             their cyclical       commodity
                                                                            lows through 2016, prices
                                                                                               but over the
(in  conjunction      with   delays   to the  interest  rate  tightening     cycle in
December quarter 2016 and March quarter 2017, key commodities experienced significant the US) has rises,
                                                                                                   also
particularly iron ore and coal – Australia’s flagship commodity exports (accounting for almost a thirdisof
driven    an  appreciation     of  the  Australian    dollar  towards     (and  above)   US$0.80,  which
likely
the     to of
     value have    a contractionary
              exports                    impact The
                        of goods and services).    on other
                                                       jump intrade-exposed       industries, slowing
                                                                coal prices was underpinned   by a      the
structural readjustment
government-driven      curtailmentneeded   in the ineconomy
                                    of production               to achieve
                                                      China, while            more demand
                                                                    stronger global  balanced
                                                                                            andgrowth.
                                                                                                 disruptions
in Australia also played a part in the price increases of both coal and iron ore. China has since eased
Prices
its      for most
    production        resource
                restrictions  andcommodities       recovered
                                   a large portion of supply hasfrom    their back
                                                                   now come    cyclical lows through
                                                                                    onstream, causing
2016, but
average       over
          export     the December
                  prices                quarter
                          to pull back over       2016
                                             the June     and March
                                                       quarter  2017. quarter 2017, key commodities
experienced significant rises, particularly iron ore and coal, Australia’s flagship
BIS Oxford Economics believes the recent strengthening in the Australian dollar will be relatively
commodity exports, which together account for almost a third of the value of exports
short-lived. Iron ore and thermal coal prices are predicted to continue to retreat from recent peaks,
of goods and services.
while global prices for a number of commodities are expected to ease somewhat over 2017/18 before
recovering
The jumpover      subsequent
             in coal          yearsunderpinned
                      prices was    as the global oversupply  in a number of commodities
                                                   by a government-driven                  dissipates.
                                                                                 curtailment    of
production in China, while stronger global demand and disruptions in Australia also
played a part in the price increases of both coal and iron ore. China has since eased its
production restrictions and a large portion of supply has now come back onstream,
causing average export prices to pull back over the June quarter 2017.
                                                                                                               Iron ore and thermal coal
BIS Oxford Economics believes the recent strengthening in the Australian dollar will                           prices are predicted to
be relatively short-lived. Iron ore and thermal coal prices are predicted to continue                          continue to retreat from
to retreat from recent peaks, while global prices for a number of commodities are                              recent peaks
expected to ease somewhat over 2017/18 before recovering over subsequent years as
the global oversupply in a number of commodities dissipates.

Western Australian Infrastructure Report 2018                                                                                       13
WA economic outlook

                          Figure 1.2 Commodity prices
                                                Figure(A$)
                                                       1.2 Commodity Prices (A$)

                                    Quarterly Average Prices (Log Scale)

                           640                                                                                                           1.20
                                                                                              AUD Quarterly Average (RHS)

                           320                                               Coking Coal                                                 1.00
                                                                               (A$/t)

                           160                                                                                                           0.80

                            80                                                                                                           0.60
                                                                                                Crude Oil (Brent)
                                                                                   Thermal Coal     (A$/bbl)
                            40                                                        (A$/t)                                             0.40

                                                          Iron Ore
                            20                              (A$/t)                                                                       0.20

                            10                                                                                                           0.00
                                 1995   1997    1999    2001     2003      2005   2007     2009   2011   2013    2015    2017     2019

                           As at June                                                               Source: BIS Oxford Economics, OCE data

                          Outlook for the Australian Economy

                          Outlook
                          The Australian for  thegrew
                                         economy    Australian
                                                       by just 2.0 per economy
                                                                       cent in 2016/17 – the weakest rate of growth since
                          2008/09. While a weak outcome, this result extends Australia’s long period of uninterrupted economic
                          The Australian
                          growth to 26 yearseconomy   grew
                                             – a new world   by just 2 per cent in 2016/17 – the weakest rate of
                                                           record.
                          growth since 2008/09. While a weak outcome, this result extends Australia’s long
                          Large slices of luck and lessons learned from the last recession (in 1990/91) have helped successive
                           period of uninterrupted economic growth to 26 years – a new world record.
                          Australian governments and the Reserve Bank of Australia steer the economy through the 1997/98
                          Asian crisis, the 2000/01 downturn, the global financial crisis in 2008, and a large bust in resources
                           Large slices of luck and lessons learned from the last recession in 1990/91 have
                          investment since 2012/13.
                          helped successive Australian governments and the Reserve Bank of Australia steer
                          Overall, however,
                           the economy      the Australian
                                          through          economyAsian
                                                     the 1997/98     has been  unable
                                                                            crisis, theto2000/01
                                                                                          sustain economic  growth
                                                                                                    downturn,   theabove 3 per
                                                                                                                     global
                          cent since the peaking of the resources investment  cycle  in 2012/13. Much of this
                           financial crisis in 2008, and a large bust in resources investment since 2012/13.  weaker economic
                          performance is due to very weak growth in domestic demand during the period, which has been
   Slower growth in the    Overall, however,
                          negatively           the
                                     impacted by theAustralian  economy
                                                      ongoing decline        has been
                                                                      in resources       unable to sustain economic growth
                                                                                    investment.
 Australian economy has    abovepartially
                          While   3 per cushioned
                                          cent sincebythe    peaking
                                                         a boom         of the resources
                                                                  in residential investmentinvestment
                                                                                              since 2013/14cycle
                                                                                                             and, in 2012/13.
                                                                                                                  more  recently, by a
  been due to very weak    Much ofinthis
                          recovery         weaker
                                      public          economic
                                              infrastructure      performance
                                                             investment,   economic isgrowth
                                                                                       due tohasvery  weak
                                                                                                   also beengrowth
                                                                                                              hamperedin by
                                                                                                                         domestic
                                                                                                                            record low
     growth in domestic    demand
                          growth     during
                                 in wage       the period,
                                           incomes,           which has
                                                      with households       been negatively
                                                                         spending   more of what impacted
                                                                                                  they earn by
                                                                                                             andthe ongoing
                                                                                                                 reducing      decline
                                                                                                                           savings  to
                demand     in resources
                          maintain         investment.
                                   just moderate    household expenditure growth. Weak wage growth has also driven weaker
                          than budgeted tax revenues for governments, lengthening the time horizon required to return to
                           While partially
                          sustainable budgetcushioned       by alimiting
                                                surpluses, and    boomthe infirepower
                                                                              residential   investmenttosince
                                                                                        of governments           2013/14
                                                                                                            counter          and,
                                                                                                                    weak private
                           more recently,
                          investment         by a public
                                      with higher   recovery   in public
                                                          investment        infrastructure
                                                                       without                investment,
                                                                                further increasing            economic growth
                                                                                                    public debt.
                          has also been hampered by record low growth in wage incomes, with households
                          spending more of what they earn and reducing savings to maintain just moderate
                          household expenditure growth. Weak wage growth has also driven weaker-than-
                          budgeted tax revenues for governments, lengthening the time horizon required to
                          return to sustainable budget surpluses, and limiting the firepower of governments
                          to counter weak private investment with higher public investment without further
                          increasing public debt.

                          Unlike many other resources-exporting economies, Australia did not experience a
                          recession in the wake of the resources investment bust. Strong growth in mining
                          production and exports from world class, competitive deposits, supercharged by a
                          much lower dollar – which also stimulated other exports of goods and services – has

14                                                                                                BIS Oxford Economics – CCF WA
helped offset some of the pain from weaker demand growth. Economic growth, which
includes net exports, has generally been higher than growth in domestic demand.

The challenge for Australia is that mining exports, particularly, are highly capital –
rather than labour – intensive. Stronger, sustainable growth in employment requires
stronger growth in local expenditures; in domestic demand. In turn, this requires the
return of growth in non-mining business investment, which has remained stalled since
the GFC.

The problem for non-mining industry sectors has generally been weak growth in
demand, weak profits and excess capacity. In that environment, it is foolhardy for            Despite low interest rates,
businesses to invest ahead of requirements, straining cash flows and locking in               most businesses are still
additional costs before they have the revenue to support them. Most businesses are            in cost-cutting mode,
still in cost-cutting mode, preserving cash and deferring investment until demand             deferring investment
recovers. Low interest rates in this environment have had relatively little impact.           until demand recovers
While there has been plenty of funds available, this just hasn’t been the business
environment for investment. That will come later.

The next growth phase in the Australian economy will be driven by non-mining
business investment. When it does recover, it will be to service growing demand,
driven by a growth logic – evidenced by rising profits – and augmented by a
technology catch-up. In turn, this will have a strong multiplier through business
services into the rest of the economy. While non-mining business profits did increase
in the June quarter 2017, it is still too early to say that businesses are confident in the
path of future demand and profits, and are willing to make the psychological shift from
caution to a ‘go for growth’ investment mentality.

Part of the reason for this is that nationally, by region and industry, growth and
profitability is highly fragmented. New South Wales and Victoria, after spending much
of the mining boom years suppressed, have returned to very strong economic growth.
But growth in demand is still very weak in many other regions. In some states such as
WA and Queensland, state final demand has outright declined.

Challenges remain ahead for the Australian economy, too, which are likely to keep
business confidence and investment on a weak plane over the next two years. Wage
growth, except for skilled professions and trades in some sectors and states, is likely
to remain relatively weak, affecting retail trade and household expenditures. Politics is
highly adversarial, with major political parties unable to forge a workable consensus
on many important policy areas surrounding taxation, energy security, and the
environment. But, more importantly, investment cycles across Australia are likely to
remain highly unsynchronised over the next two years – keeping overall economic
growth constrained to around 2.5 per cent per annum on average over 2017/18 and
2018/19.

These unsynchronised investment cycles include:
  • Residential investment, a key driver of growth over the three years to 2015/16,
    which is expected to have peaked in 2016/17 and then decline over the next
    three years, with particularly large declines expected in the volatile high-density
    apartment market.
  • Mining investment is now entering its fifth year of an expected six-year decline,
                                                                                              Mining equipment
    with further significant declines to come over the next 18 months as the LNG
                                                                                              purchases and
    investment boom finally runs its course. This will see mining construction fall
                                                                                              exploration have started
    around 78 per cent from the 2013/14 peak to the 2018/19 trough. However,
                                                                                              to recover
    mining equipment purchases and exploration have started to recover across most
    commodities, indicating the initial stages of the next upturn.
  • Public investment finally started to recover in 2015/16 after five years of decline,
    surging 14 per cent in 2016/17 alone. Growth in public investment is being
    supported by new transport infrastructure, but will be offset in part after 2017/18
    by falling investment in Australia’s largest public infrastructure project – the NBN.

Western Australian Infrastructure Report 2018                                                                       15
WA economic outlook
                                     •   Public investment finally started to recover in 2015/16 after five years of decline, surging 14
                                         per cent in 2016/17 alone. Growth in public investment is being supported by new transport
                                         infrastructure, but will be offset in part after 2017/18 by falling investment in Australia’s
                                     Totallargest
                                            public   investment is expected to be flat or falling, and hence be a drag on
                                                  public infrastructure project – the NBN. Total public investment is expected to be flat
                                     Australia’s
                                         or falling (and hencegrowth,
                                                   economic      be a dragbyonthe   end of economic
                                                                                Australia’s the decade.
                                                                                                      growth) by the end of the decade.
                                   • Non-mining business investment is currently showing only modest growth but
                                      • Non-mining business investment is currently showing only modest growth but is expected to
                                     is expected  to strengthen from late decade as higher profitability, demand and
                                         strengthen from late decade as higher profitability, demand and capacity utilisation (in turn
                                     capacity  utilisation  a change
                                         supported by a slightly weakerinAustralian
                                                                          psychology.
                                                                                    dollar) drive a change in psychology.

                              Figure 1.3: Australia – basic economic indicators
                                                Figure 1.3: Australia – Basic Economic Indicators

                                   Per Cent                                                                                    Forecast
                               8                                                                                                            15
                                                            Real GNE
                               6
                               4                                                                                                            10
                               2
                                                                                          Real GDP
                               0                                                                                                            5
                              -2
                                                             External Contribution
                              -4                                                                                                            0
                                 89    91     93      95      97       99   01       03   05   07      09     11    13     15   17     19
                               Year ended June                                                       Source: BIS Oxford Economics, ABS data

                                     Contribution to Domestic Demand - Per Cent                                                  Forecast
                               2                                                                                                          20
                                                                                                                                          18
                                                                                                                                          16
                                                                                 Public Consumption                                       14
                               1                                                                                                          12
                                                                                                                                          10
                                                                                                                                          8
                               0                                                                                                          6
                                                                                                                                          4
                                                Public Investment                                                                         2
                              -1                                                                                                          0

                                 89    91     93       95     97       99   01       03   05    07     09     11     13    15   17     19
                               Year ended June                                                       Source: BIS Oxford Economics, ABS data

                              Consequently, domestic demand growth will improve markedly late in the decade, as the declines in
                              mining and residential investment bottom out and start showing signs of recovery. Capacity
                              constraints and expected improvements in business confidence are predicted to drive an acceleration
                              Consequently,
                              in                 domestic
                                 non-mining business       demand
                                                       investment. Butgrowth
                                                                       until thatwill improve
                                                                                  time,  economic markedly
                                                                                                    growth and late  in thearedecade,
                                                                                                                 inflation     expectedasto
                              remain  relatively
                              the declines    insubdued,  with the
                                                 mining and        Reserve Bank
                                                               residential          unlikely to
                                                                             investment         be in a out
                                                                                             bottom     strong
                                                                                                            andposition  to raise interest
                                                                                                                  start showing      signs
                              rates until 2019/20.
                              of recovery.    Capacity constraints and expected improvements in business confidence
      The Reserve Bank is
 unlikely to be in a strong   are predicted
                              Outlook for WAto drive an acceleration in non-mining business investment. But until
 position to raise interest   that time, economic growth and inflation are expected to remain relatively subdued,
                              Differences in the timing and magnitude of regional investment cycles are creating large differences in
      rates until 2019/20     with the Reserve Bank unlikely to be in a strong position to raise interest rates until
                              economic performance and construction activity by state. Strong pipelines of infrastructure projects,
                              2019/20.
                              relative undersupply in housing, higher population growth and private sector confidence to invest is
                              driving a construction upswing in New South Wales and Victoria, which in turn is spilling over into
                              broader industry growth.

                              Outlook for WA
                              Differences in the timing and magnitude of regional investment cycles are creating
                              large differences in economic performance and construction activity by state. Strong
                              pipelines of infrastructure projects, relative undersupply in housing, higher population
                              growth and private sector confidence to invest is driving a construction upswing in
                              New South Wales and Victoria, which in turn is spilling over into broader industry
                              growth.

                              The eastern states – led by NSW and Victoria – are at the start of a tremendous
        The eastern states
                              wave in land transport investment, as shown in Figure 1.5 (page18), which is being
   boom in land transport
                              supercharged by asset recycling strategies and strong growth in own-source revenues
infrastructure investment
                              from property taxes, in turn driven by robust increases in population growth. This
   is drawing in resources
                              boom in land transport infrastructure investment is drawing in resources from other
         from other states,
                              states, including WA, which will create its own challenges as other states begin to
             including WA
                              increase their own infrastructure investment.

16                                                                                                   BIS Oxford Economics – CCF WA
driving a construction upswing in New South Wales and Victoria, which in turn is spilling over into
broader industry growth.

        Figure
         Figure 1.4:  Comparisons
                1.4: Comparisons     of State
                                 of State (SFD)(SFD)  and national
                                                and National         (GNE)
                                                             (GNE) Growth    growth
                                                                          in Final    in final
                                                                                   Demand
        demand

        16%
                       Australia Gross National Expenditure             Queensland State Final Demand
        14%
                       Western Australia State Final Demand             South Australia State Final Demand
        12%

        10%

         8%

         6%

         4%

         2%

         0%
               87     89     91     93     95      97       99     01      03     05      07     09      11     13    15      17     19
         -2%

         -4%

         -6%

         -8%
               Year ended June                                                                        Source: ABS, BIS Oxford Economics

                     Australia Gross National Expenditure          Victoria State Final Demand          NSW State Final Demand
         9%

         7%

         5%

         3%

         1%

         -1%   87     89     91     93      95     97         99   01      03      05     07     09      11     13     15     17     19

         -3%

         -5%
               Year ended June                                                                        Source: ABS, BIS Oxford Economics

The eastern states – and particularly New South Wales and Victoria – are at the start of a tremendous
         By contrast,
wave in land  transportinvestment
                         investment,growth
                                      as shownand   construction
                                                in Figure 1.5, whichactivity
                                                                      is being remains   relatively
                                                                               supercharged   by assetweak
recyclingor
          strategies and
            falling in   strong
                       the      growth
                            former      in own source
                                    resources    boomrevenues   from
                                                        states of      property taxes
                                                                   Queensland      and(inWA.
                                                                                          turnThese
                                                                                               driven by
                                                                                                      states
robust increases
         are nowingenerating
                     population growth).
                                 strong This boomininmining
                                          growth      land transport infrastructure
                                                              production            investment
                                                                             and exports     as aisdirect
        consequence of the previous resources investment boom, boosting GSP. However,                                                     Strong growth in mining
        growth in SFD – the sum of household consumption, government consumption                                                          production has boosted
        and investment, both public and private – has been very weak or negative in recent                                                WA’s gross State product
        years. This is important, as growth in SFD tends to be a greater driver of growth in                                              but growth in State final
        employment and incomes than growth in capital-intensive mining exports.                                                           demand has been very
                                                                                                                                          weak or negative in
        Real SFD in WA has been in decline since 2013/14, but the pace of contraction                                                     recent years.
        intensified in 2015/16 (minus 4 per cent) and 2016/17 (minus 7.4 per cent) as
        the resources investment bust hit hardest and, in 2014/15 and 2015/16, public
        investment also contracted. Overall, the 2016/17 outcome was the worst in the State’s
        history, while the 15 per cent cumulative decline since 2012/13 is also a record – in
        terms of both the period of contraction (four years) and magnitude.

        Western Australian Infrastructure Report 2018                                                                                                           17
drawing in resources from other states, including Western Australia, which will create its own
WA economic outlook
                            challenges as other states begin to increase their own infrastructure investment.

                            Figure 1.5:
                               Figure 1.5:Major
                                           Major transport project Construction
                                                 Transport Projects construction(over $2 billion in Construction Value)
                            (over $2 billion in construction value)

                                   $ Billion (in FY15 constant prices)           Forecast                                  SA North-South Corridor
                            10.5                                                                                           WA Forrestfield Airport Rail Link & Metronet
                                   Notes: This chart is based on projects with                                             WA Hancock Roy Hill (Pilbara)
                                   over $2 billion in construction work done.                                              WA Fortescue Metal Group (Pilbara)
                                   Solid areas are road projects, dotted areas                                             WA BHP Billiton (Pilbara)
                             9.0   are rail projects.                                                                      WA Rio Tinto (Pilbara)
                                   Source: BIS Oxford Economics                                                            VIC Melbourne Airport Link
                                                                                                                           VIC Inland Rail (VIC component)
                                                                                                                           VIC Melbourne Metro Rail
                             7.5                                                                                           VIC Level Crossing Removal Program
                                                                                                                           VIC Regional Rail Link
                                                                                                                           VIC North East Link
                                                                                                                           VIC Western Distributor
                             6.0                                                                                           VIC EastLink
                                                                                                                           QLD Acacia Ridge to Port of Brisbane
                                                                                                                           QLD Cross River Rail
                             4.5                                                                                           QLD Inland Rail (QLD component)
                                                                                                                           QLD Warrego Highway
                                                                                                                           QLD Gateway Motorway
                                                                                                                           QLD Bruce Highway Upgrade
                             3.0                                                                                           QLD TransApex
                                                                                                                           QLD Ipswich Motorway
                                                                                                                           NSW Inland Rail (NSW component)
                                                                                                                           NSW Sydney Metro West
                             1.5                                                                                           NSW Sydney Metro City & Southwest
                                                                                                                           NSW Sydney Metro Northwest
                                                                                                                           NSW F6 Extension
                                                                                                                           NSW Western Harbour Tunnel & Beaches Link
                             0.0                                                                                           NSW Western Sydney Infrastructure Plan
                                2006      2009            2012         2015       2018        2021       2024       2027   NSW NorthConnex
                                                                                                                           NSW WestConnex
                                Year ended June                                             Source: BIS Oxford Economics   NSW Pacific Highway Upgrade

                            By contrast, investment growth and construction activity remains relatively weak or falling in the
                            former resources boom states of Queensland and Western Australia. These states are now
                             The good news is that the worst of the decline in SFD has now passed in WA. But it
                            generating strong growth in mining production and exports as a direct consequence of the previous
                             is too early to say strong growth in demand (and employment) is going to return
                            resources investment boom, boosting Gross State Product (GSP). However, growth in State Final
                             anytime soon. Rather, the immediate prospects for the WA economy is for flat growth
                            Demand (SFD, the sum of household consumption, government consumption and investment – both
                             in SFD at best over the next two years as the tail end of the LNG investment bust
                            public and private) has been very weak or negative in recent years. This is important, as growth in
                             (expected to strip another $10 billion in measured investment) and further falls in
                            SFD tends to be a greater driver of growth in employment and incomes than growth in capital-
                             residential building offset weak growth in household and government spending.
                            intensive mining exports.
  Flat growth would be a    Improved prospects for new mining investment through sustained higher commodity
substantial improvement     Real  SFD
                             prices  hasinthe
                                           Western   Australia
                                               potential       has been
                                                          to provide       in decline
                                                                        some   upsidesince    2013/14,
                                                                                        to this         butbut
                                                                                                 outlook,   the this
                                                                                                                pacewill
                                                                                                                      of contraction
                                                                                                                          be an
 – and confidence builder   intensified
                             improvement in 2015/16
                                               at the(minus
                                                      margins4 per   cent) Only
                                                                at best.   and 2016/17
                                                                                 once the (minus  7.4 perof
                                                                                            full impact   cent)
                                                                                                             the as the resources
                                                                                                                 resources    bust
 – compared to the sharp    investment    bust hit hardest
                             has been absorbed,            and,
                                                     as well  as in
                                                                  its2014/15
                                                                      impactand    2015/16,sectors
                                                                               on affected    public investment   also contracted.
                                                                                                       such as housing,    can it beOverall,
contraction over the past   the
                             said2016/17
                                  that the outcome   was theisworst
                                             WA economy         backintothe  state’s history,
                                                                          sustainable,        while the
                                                                                          stronger      15 perEven
                                                                                                     growth.    cent so,
                                                                                                                     cumulative   decline
                                                                                                                         flat growth
               few years.   since
                             from 2012/13
                                   here wouldis also
                                                   beaarecord  – in terms
                                                        substantial        of both the –period
                                                                       improvement              of contraction
                                                                                          and confidence       (four years)
                                                                                                             builder         and magnitude.
                                                                                                                      – compared
                             to the
                            The      sharp
                                  good     contraction
                                        news             of theofstate
                                             is that the worst         economy
                                                                  the decline     overhas
                                                                              in SFD   thenow
                                                                                           past  few years.
                                                                                               passed  in Western Australia. But it is
                            too early to say that strong growth in demand (and employment) is going to return anytime soon.
                             Broader measures of economic activity, such as GSP, which includes the value of
                            Rather, the immediate prospects for the Western Australian economy is for flat growth at best in SFD
                             net exports on top of domestic demand, will recover more quickly in WA given
                            over the next two years as the tail end of the LNG investment bust (expected to strip another $10
                             strong export growth, particularly gas exports as new LNG facilities ramp up to full
                            billion in measured investment) and further falls in residential building offset weak growth in
                             production. The lower post-boom Australian dollar is also stimulating exports and
                            household and government spending. Improved prospects for new mining investment through
                             investment in other trade-exposed industry sectors that were hit hard during the
                            sustained higher commodity prices has the potential to provide some upside to this outlook, but this
                             boom years. WA – and Perth particularly – has already seen a strong recovery in new
                            will be an improvement at the margins at best. Only once the full impact of the resources bust has
                             accommodation building, and future growth in exports of services such as tourism,
                            been absorbed, as well as its impact on affected sectors such as housing, can it be said that the
                             education and business services in addition to agriculture, mining and manufacturing
                            Western Australian economy is back to sustainable, stronger growth. Even so, flat growth from here
                            products will also assist recovery in the broader WA economy over the next few years.

18                                                                                                         BIS Oxford Economics – CCF WA
Need for an open policy conversation to drive sustainable
long-term growth
By the end of the decade, BIS Oxford Economics expects the WA economy will be back
to achieving more ‘normal’ rates of sustainable growth – both in terms of domestic
demand (SFD) and the broader economy (GSP). But the next few years will remain
challenging. This tough reality is reflected in the recently released 2017-18 State
Budget, which itself forecasts another decline in SFD in 2017/18 – stretching the total
decline over five consecutive years – before eking out very weak (1 per cent) growth in
2018/19.

While containing several positive initiatives to support new growth industries
(tourism, education, defence, science and innovation), the 2017-18 State Budget did
not offer a completely convincing strategy for delivering sustainable economic growth
over the long term. Some measures, such as the new payroll tax provisions, higher
gold royalties and increased utility charges, while aimed at budget repair, may have a
contractionary impact on the State economy in the near term.

While new road and rail infrastructure investment in the State Budget is welcome          The State Budget projects
in the near-term, the Budget projects a substantial decline in general government         a substantial decline
infrastructure investment over the forward estimates, which will be a drag on growth      in general government
during the recovery phase of the State economy and potentially to levels representing     infrastructure investment
underinvestment in infrastructure. Some promised infrastructure projects, such as the     over the forward
Ellenbrook rail line, although credibly proposed were not funded in the State Budget,     estimates
raising concerns that their timelines may be pushed back as the State Government
concentrates on budget repair.

With the State economy now past the worst of the resources investment downturn,
there is no better time to have an open and transparent discussion on the long term
economic strategy for WA. This should concentrate on leveraging from (or improving)
WA’s core or potential strengths compared to eastern state rivals such as its:
  • More affordable housing.
  • Lower “cost of living” and “cost of doing business” pressures, particularly with
    regards to transport, utilities (notably energy), commercial rents, and government
    charges.
  • Closer proximity to Asia and further afield, with Perth in the unique position
    within Australia to offer direct flights to London from early 2018.
  • Abundant natural resources, including mineral wealth and iconic tourism
    destinations.
  • Enviable lifestyle benefits.

The core aim of the economic strategy should be to attract businesses and people
back to WA following the exodus of population and consequent very weak population
growth in aggregate since the end of the resources investment boom.

Overall, the public sector only makes up a very small part of the total WA economy –
around 16 per cent in expenditure terms – and this is not expected to change in the
future. Consequently, achieving longer term economic goals will depend crucially on
how the public sector can develop policies to stimulate private decisions on where to
invest and live.
                                                                                          Sustained investment in
While acknowledging the measures announced in the State Budget, sustained                 productive infrastructure
investment in productive infrastructure will be a critical component of a broader         will be a critical
economic strategy. This includes sustained investment in transport and utilities to       component of a broader
ensure cities and regional centres offer competitive benefits compared to eastern state   economic strategy
counterparts and help keep cost of living (and cost of business) pressures contained.
It also means investing in critical infrastructure for new growth regions to stimulate

Western Australian Infrastructure Report 2018                                                                  19
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