It was another challenging year for the global economy and financial markets, impacted by Brexit and the victory by Donald Trump in the United States elections. A State Election was held in Western Australia on 11 March 2017, resulting in a new government and the announcement that the 2017-18 State Budget would be released on 7 September. Economic information is based on available data, as at 21 August 2017.
Key highlights of the economic environment in which WATC operated during 2016/17 were:
Western Australian real Gross State Product (GSP) increased by an estimated 0.5 per cent in 2016/17
Western Australian merchandise exports is estimated to total $111.5 billion in 2016/17
The Australian economy is estimated to have grown 1.75 per cent in 2016/17 and is forecast to grow 2.75 per cent in 2017/18.
The Western Australian Economy
Western Australia is a leading global producer and exporter of a wide variety of commodities. The State has cemented its position as the world’s largest exporter of iron ore, while LNG exports are ramping up and are expected to double over the next three years. By 2020, Western Australian installed LNG production capacity is likely to advance to third largest in the world, behind Qatar and the United States. Western Australia accounted for an estimated 42 per cent of the total value of Australia’s merchandise exports in 2016/17.
Western Australian real GSP increased by an estimated 0.5 per cent in 2016/17 (as per the Pre-election Financial Projections Statement released in February 2017), after rising 1.9 per cent in 2015/16 (see Figure 1). An estimated 8.0 per cent rise in export volumes made the largest contribution to overall growth. Seasonally adjusted real state final demand contracted by 6.6 per cent in year on year terms in the first quarter of 2017, as a 25.8 per cent fall in business investment and a larger than expected 23.3% decline in dwelling investment more than offset a 1.2 per cent rise in household consumption. The State unemployment rate has averaged 6.2% in 2016/17, compared to 6.0% in 2015/16.
Figure 1: Gross Domestic Product and Gross State Product – Annual Growth
* 2016-17 is an estimated actual as of February 2017.
Source: Department of Treasury, Commonwealth Treasury and Australian Bureau of Statistics.
Outlook for Western Australia
Rising export volumes will be the major contributor to an expansion of the State economy in 2017/18. Real state final demand is expected to remain in contraction, with declining mining investment again the major drag on the economy and household consumption growth remaining below the long run average. Business investment will remain impacted by major projects continuing to transition into operational and production phases.
Fiscal Outlook for Western Australia
As reported by the Department of Treasury (Fees and charges: The state of the finances, June 2017), the general government operating deficit is “expected to peak at $3.0 billion in 2016/17.” The State’s net debt has grown to “$33 billion forecast by the end of 30 June 2017 and over $42 billion by 30 June 2020.” Furthermore, the Department of Treasury advised that Western Australia has continued to experience record low GST grant levels and remains heavily disadvantaged by the Horizontal Fiscal Equalisation regime, with the State’s GST ‘relativity’ (the ratio of GST grant to its population share of GST) for 2017/18 being less than 35 per cent. This follows a record low GST relativity of 30 per cent in 2015/16. Compared to its population share, Western Australia “misses out on $4.5 billion in GST revenue in 2016/17”.
The Australian Economy
Australian economic growth is estimated to have slipped to 1.75 per cent in 2016/17 from 2.6 per cent in 2015/16, with growth affected by a number of weather-related events. The transition from resource driven to non-mining sector driven growth remains slow, with the east-coast housing construction boom supporting the economy as mining investment continues to unwind. National income has also been boosted by a sharp increase in the terms of trade in the final quarter of 2016 and the first quarter of 2017. Real gross domestic income (real GDP growth adjusted for the terms of trade) rose 6.5 per cent year-on-year in Q1 2017.
Strong employment growth towards the end of 2016/17 has seen the seasonally adjusted unemployment rate fall to 5.5 per cent in May 2017, the lowest level since February 2013. The unemployment rate averaged 5.7 per cent over the course of 2016/17. Annual headline CPI inflation closed 2015/16 at 1.0 per cent but by Q1 2017, inflation had climbed to 2.1 per cent, which is back within the Reserve Bank of Australia (RBA)’s target band of two to three per cent. However, the various measures of underlying inflation remained below target, with the average of the trimmed mean and weighted median measures of underlying inflation sitting at 1.8 per cent year-on-year in Q1 2017.
The Global Economy
The global economy appears to have been relatively buoyant, by recent standards, in the first half of 2017, following sluggish growth in 2016. In the United States, real GDP growth was a little soft in the first quarter of 2017, however, annual growth picked up to 2.1 per cent year on year, the fastest growth rate since the third quarter of 2015. Elsewhere, the Chinese economy continues to settle into a lower growth profile, though growth remained solid at 6.9% YoY in early 2017. The Japanese and Eurozone economies have continued to improve, heavily supported by central bank stimulus.
The monetary policy stance of key central banks remains highly stimulatory, although the policy outlook has turned a little hawkish. Theraised the Fed funds target range by 75 basis points over the course of 2016/17 to 1.00–1.25 per cent and at its June 2017 meeting, announced plans to begin the process of unwinding its balance sheet in the second half of 2017. The continues to run a large quantitative easing program, however, recent comments from officials have sparked speculation that it will begin to reduce the size of its monthly asset purchases in early 2018. The term of the current program is set to expire in December 2017. The Bank of Japan remains committed to a policy of yield curve control, with a target of keeping the 10-year Japanese government bond yield close to zero per cent.
The(IMF) World Economic Outlook released in April 2017 saw the IMF revise up its forecast for global growth in 2017. The IMF now expects global growth of 3.5 per cent in 2017, up from the January forecast of 3.4 per cent. If accurate, this would make 2017 the best year for global growth since 2014. The IMF is forecasting 2.3 per cent growth in the United States, 1.2 per cent in Japan, 6.6 per cent in China and 1.7 per cent in the Eurozone.
Low inflation saw the RBA cut the cash rate by 25 basis points to a fresh record low of 1.50 per cent in August 2016. The RBA appears content to leave the cash rate on hold for an extended period.
The 3-year Australian government bond yield opened the 2016/17 financial year at 1.55 per cent and slipped to a low of 1.37 per cent in August 2016. Yields then rose in the following months, with the 3-year yield peaking at 2.13 per cent in March 2017. The 3-year yield closed 2016/17 at 1.90 per cent. The 10-year Australian government bond yield followed a similar pattern (see Figure 2), opening the 2016/17 financial year at 1.98 per cent and falling as low as 1.82 per cent in August 2016, before following global bond yields higher to reach a peak of 2.98 per cent in March 2017. The 10-year yield has since slipped back to 2.60 per cent at 30 June 2017.
Figure 2: Australian Government 10-year Bond Yield
The Australian dollar averaged USD0.7541 on a close-of-day basis in 2016/17, after averaging USD0.7286 in 2015/16, as the narrowing of the Australian dollar’s yield advantage to the US dollar was offset by higher commodity prices. The Australian dollar began the 2016/17 financial year trading at USD0.7451 and then rose to a peak of USD0.7762 in November 2016, before falling sharply against a stronger US dollar in the wake of the US Presidential election. The expectation that President Trump’s pro-growth agenda would see thetighten policy faster than previously expected was a major driver in the US dollar’s increase. While the Australian dollar fell as low as USD0.7176 in December 2016, it soon recovered as political troubles began to bedevil the new Trump administration, putting its policy agenda in doubt. The Australian dollar closed 2016/17 at USD0.7689.