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

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Western Australian Economic Summary2006 No.3Perth’s consumer inflation is likely to ease in the near future as fruit and fuelprices ease, and will decelerate further if house price growth slows.The outlook for the world economy in the short to medium term is fairlyrobust 1 , but Australia’s commodity prices have levelled off in recentmonths, and global commodity prices are expected to soften over the nextfew years 2 .Production of a number of the State’s key resource commodities is likely toincrease as the strong investment of recent years (both in Western Australiaand globally) raises capacity. The IMF 3 and World Bank 4 predict that priceswill remain above historical averages rather than dropping to pre-boomlevels. Falling prices could lead to some easing in mining investment inWestern Australia, although this will be modest if demand is still robust andprices stay above historical averages 5 .Current and future trends in commodity prices, and their relationship toproductivity and welfare in Western Australia’ s economy, are discussed inthis publication’s first feature article on page 54.The second feature article on page 75 discusses the use of ComputableGeneral Equilibrium Models for major project assistance analysis.State Accounts 2005-06Western Australia’s real Gross State Product (GSP) rose by 4.9% in 2005-06.The GSP growth estimate for the previous year has been revised to 4.7%, upfrom an initial estimate of GSP growth in 2004-05 rate of 2.7% published inNovember 2005.Growth of 10.9% in State Final Demand over 2005-06 was largely driven bybusiness investment (up 37%, and contributing 6.1 percentage points togrowth) and household consumption (up 3.9% and contributing1.9 percentage points to growth).1 The International Monetary Fund has noted generally buoyant global economicconditions in its World Economic Outlook (September 2006 edition), with above-trendglobal economic growth forecast of 5.1% in 2006 and of 4.9% in 2007.2 Access Economics September quarter 2006 Minerals Monitor (the Monitor providesan outline of the views and consensus forecasts of 11 resource commoditiesforecasters). Also see next two footnotes below.3 Australia: Selected Issues. IMF Country Report No. 06/373, October 2006.pp. 26-374World Bank Group (Oil, Gas, Mining and Chemicals Department). 2006.Background Paper: The Outlook for Metals Markets; Prepared for G20 DeputiesMeeting Sydney 2006. World Bank. Washington. p.ii5 For more information on this and other possible risks to growth, see “Risks to theoutlook” section at the end of this chapter.2 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryThe weaker growth in the broader GSP measure arose partly because realnet exports detracted 3.0 percentage points from GSP growth, reflecting botha small fall in the volume of exports and strong imports growth. This doesnot, however, reflect changes in export values driven by higher commodityprices – while merchandise exports fell by 0.9% in volume terms, they grewin value by 25% due to higher commodity prices.In current prices, the State’s GSP grew by 15.9% in 2005-06, which was morethan three times the growth in real GSP of 4.9%. The main reason for thisstrong current price growth was higher export prices, which underpinnedgrowth in the GSP price deflator of 10.5%, while the deflator for domesticdemand rose by just 4.5%.Real GSP growth measures increases in the volume of production. Changesin prices are not reflected in the growth rate, even though such increases canlead to greater spending power throughout the economy. Real GSP can be apoor measure of changes to the community’s economic well-being whenexport prices are rising faster than domestic prices. Rising relative exportprices mean that a given volume of domestic production can be exchangedfor a larger volume of imports, raising the community’s real spendingpower.A better indicator of spending power in these circumstances is real GrossState Income, which measures the purchasing power of domestic productionby adjusting the volume of exports to reflect changes in the terms of trade.In 2005-06, Western Australia’s real Gross State Income increased by 10.6%,following an increase of 8.5% in 2004-05. Growth in Gross State Income hasexceeded GSP growth significantly in recent years, reflecting the effect ofrising commodity prices and the increasing terms of trade on the State’s realpurchasing power (Figure 1).18%16%14%12%10%8%6%4%2%0%-2%Figure 1MEASURES OF ECONOMIC GROWTHWestern Australia, Annual1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06Real Gross State Product Real Gross State Income Nominal Gross State ProductSource: ABS Cat. 5220.0Department of Treasury and Finance 3
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