No. 3 - Department of Treasury - The Western Australian Government

2006 No.3 Western Australian Economic SummaryIntroductionThe resources boom of the past four years is unprecedented in post-warAustralia. Commodity prices are at all-time highs 1 , the terms of trade 2 arethe strongest for 40 years, and the strength of global demand hasunderpinned a strong economic expansion 3 .Western Australia has benefited more than other States from the globalcommodities boom, for three related reasons:• It is more export focussed, with exports of goods and servicesrepresenting 45% of Western Australia’s Gross State Product (GSP) in2005-06, more than any other State or Territory and more than doublethe national ratio of 20%.• Its economy is much more resource reliant. In 2005-06 mining accountedfor 27% of Western Australia’s total factor income, compared to 8%Australia-wide.• Its commodity price growth and in particular its terms of trade increasehas been even stronger than nationally in the past three years. In thethree years to June 2006 Western Australia’s commodity prices rose by79% while Australia’s rose by 68%. Over the same period, the State’sterms of trade 4 rose by 59%, while Australia’s rose by 40%.Rising commodity prices and export values have induced substantialadditional investment by business, particularly in the mining industry andrelated sectors. Real business investment has increased at an average rate ofalmost 17% a year for the past six years.Yet there have also been some puzzling trends.While Western Australia’s export values have grown strongly in response torising global commodity prices, the volume of exports has been slow torespond, despite six years of strong business investment growth.1 In nominal terms – ‘real’ commodity prices are not – see discussion on page 612 The ‘terms of trade’ is the ratio of export prices to import prices.3 The main section of this Economic Summary outlines Western Australia’s recenteconomic trends in detail, and that analysis need not be repeated here. For furtherinformation on the key features of the State’s recent economic relevant to this article,see page 3 for a discussion of growth in commodity prices and the terms of trade;page 41for growth in business investment, especially in the mining industry; andpage 49 for trends in the volume and value of exports and imports.4 For consistency, the terms of trade cited here for both Western Australia andAustralia are calculated from the implicit price deflators for imports and exports inABS Cat. 5206.0. The rise in Australia’s goods terms of trade published in ABS Cat.5302.0 was virtually identical (39% over the three years to June 2006). These dataonly cover international trade - Western Australia’s substantial interstate trade is notincluded.Department of Treasury and Finance 55