Coronavirus could impede WA economy

According to Mining News Pro - In its latest economic outlook for Western Australia, Deloitte pointed out that as Australia’s most trade-oriented state, Western Australia would feel the impact of any prolonged economic weakness in China.

More than half of Western Australia’s exports go to China, of which iron-ore makes up more than 80%, while businesses in the state also rely heavily on machinery and manufactured parts imported from China for domestic production.

Deloitte reported that the virus has frozen some parts of China’s economy, potentially shaving up to 1.0 percentage points from its full-year gross domestic product (GDP) growth in 2020. The Organisation for Economic Cooperation and Development has estimated that global growth could decelerate to 1.5% in 2020, down from a 3% forecast prior to the virus, as a result of both direct impacts from the virus spreading to other countries and flow-on effects from diminished Chinese production and demand.

In its latest Investment Monitor, Deloitte pointed out that investment projects totalling A$157-billion were recorded in Western Australia in December of last year, up 28% in value from the previous corresponding period, but still down from the peak reported in 2012.

The resources sector still accounted for around two-thirds of this investment project pipeline, Deloitte said, noting that activity in the near-term would be centered around replacement investment by iron-ore majors to sustain production levels, including Rio Tinto’s $3.8-billion Koodaideri project and BHP’s $4.6-billion South Flank operation, as well as Fortescue’s $1.8-billion and $3.8-billion Eliwana and Iron Bridge projects.

However, there was also some A$55-billion worth of potential investment activity in the liquefied natural gas (LNG) sector, including the Scarborough and Browse projects, and a potential fourth train at US major Chevron’s Gorgon operation.

However, Deloitte noted that as around 78% of this investment pipeline was still classified as ‘under consideration’, a worsening global economic market could result in these prospective projects being delayed indefinitely.

On the upside, if China responds to the outbreak with a multibillion-dollar stimulus package involving significant capital investment, Western Australia exporters could benefit from a jump in demand.

“The good news is that prior to the virus outbreak, Western Australia’s domestic economy appeared to be gaining momentum. WA state final demand grew 1.7% over the year to December 2019, the highest year-on-year growth in more than five years,” Deloitte said on Tuesday.

Accelerating growth in household consumption and a turnaround in business investment drove domestic growth over the year, helped particularly by the resources industry.

“The State Budget is also in a strong position, fuelled by windfall iron-ore royalties and careful management of expenditure growth, with A$10-billion in cumulative surpluses forecast over the four years to 2022/23. That means the Western Australian government has plenty of fiscal firepower should additional economic stimulus be required in response to Coronavirus.”