Diversification of the Western Australian Economy – Or Not?

Diversification of the economy has been a long-held ambition of a succession of Western Australian Governments of all political persuasions.

We even have a current strategy called Diversify WA. This is not the first such strategy and almost certainly not be the last. The Western Australian Government’s COVID-recovery strategy has diversification of the economy as one of its central platforms

In a former role, the proprietor recalls that in the economic beauty pageant (and that’s the polite way of putting it) known as the annual credit rating review, we twisted ourselves into knots trying to argue how diversified the Western Australian economy really was.

As a general rule the credit ratings agencies viewed diversification as a favorable attribute for an economy to have. This is because they thought that if one sector of the economy turned downwards, others would continue to provide stable revenue to the Government.

We never worked out whether that was true or not, but it sounded good.

We remember arguing that, although Western Australia had a very mining centric economy, we produced a range of different minerals and so a downturn in one sector would be offset by growth in others.

Again, we have no idea if that was true or not.

Then there were the expectations placed on any poor kind-of-technology company that dared to poke its head out of the mining-dominated landscape.

We remember the ERG a public transport smart-rider-card company, based in Balcatta as we recall, being heralded to the ratings agencies as the start of a technology-sector-focused Western Australian economy. The company was liquidated in 2018 having never gone close to the heady expectations placed upon it.

Never mind the various industry strategies that have led to series of mostly-empty industrial estates. We can recall empty gas-processing sites on the Burrup Peninsula, the aluminum smelter in Kemerton that never came or marine complexes that always seemed to lose the most lucrative defence contracts to Adelaide.

And here we are.

However, viewing the latest Gross State Product (GSP) data from tha Australian Bureau of Statistics (ABS) published on 1 December 2021, the ‘here’ has become even wilder than we could have imagined.

Back when we were contorting ourselves into twister-winning positions to argue the Western Australian economy was diverse, mining made up somewhere around 20-25% of Western Australia’s industry value added (the main component of industry GSP, it excludes taxes and subsidies on products which the ABS does not break down by industry)^[1]Much of our manufacturing is also related to mining, for example mineral processing like alumina smelting, but that doesn’t affect our point..

However, in 2020/21 mining’s share of the Western Australian economy was 49%.

Let’s say that again, despite all of the rhetoric and strategies and industry polices over previous decades – 49%.

The number was 26% in 2016/17, but it’s been all up since then. Apologies for the Excel chart, but we did this post in a hurry.

Mining Share of Annual Gross State Product, Western Australia, Current (Nominal) Prices, Financial Year Ending

To examine what is happening, we need to look at growth since the beginning of COVID-19 in both real and nominal terms. We do this by looking at official ABS industry value-added growth from 2018/19, the last full year before the advent of the pandemic, to 2020/21, our last year of data.

Before we do, industry share of GSP is always calculated in current or nominal prices, and not constant prices. This is because we want to know the share of the dollar value of the economy in one year, which effectively means we must use current prices. The share of the economy of tonnes of iron ore versus cups of coffee sold, which is what you are doing if you use constant prices, doesn’t have any meaning.

However, we do use constant prices to see how each sector of the economy is growing over time. That is, how much more stuff we are producing, which we usually (often via productivity) take as some measure of changes in our standard of living^[2]We do aggregate tonnes of iron ore and cups of coffee sold to see how the entire economy is growing, but this aggregation doesn’t make much sense out of this context.

Anyway, we can see that massive growth in the value of nominal (current price) mining value-added was behind this industries growth in GSP share. Stating the obvious has always been one of our traits.

Industry Value-Added Growth, 2020/21 over 2018/19, Western Australia

	Current Price	Constant Price
AgricultureForestryFishing	4.7%	2.2%
Mining	57.9%	4.3%
Manufacturing	10.7%	13.0%
ElecGasWater	-2.9%	-1.3%
Construction	4.0%	-1.8%
WholeTrade	21.2%	11.8%
RetailTrade	10.7%	5.8%
AccomFood	-5.3%	-3.0%
Transport	-2.8%	-10.5%
InfoMediaTelecomms	7.7%	3.6%
FinInsur	4.6%	3.1%
RentHiringReaEst	6.3%	2.0%
ProfScienceTech	8.3%	3.1%
AdminSupport	3.4%	-3.7%
PublicAdmin	9.1%	8.5%
EducationTrain	7.9%	2.8%
HealthSocial	10.7%	10.4%
ArtsRec	-0.7%	-3.2%
OtherServ	5.0%	7.1%
OwnDwel	1.5%	1.3%
Total Value Added	26.2%	3.7%

We’ll be fairly brief here, but to see how nominal mining value-added increased by this magnitude we take a quick look at the Reserve Bank of Australia’s commodity price charts for two of Western Australia’s most valuable mining products – iron ore and natural gas.

Iron ore prices, on the left hand side of the chart above (Western Australia does not export coal, so the centre and right of this chart are not relevant to this post), went berserk in 2020/21, but have since moderated^[3]These are $US prices, so the impact of exchange rate movements also needs to be taken into account..

Spot $US LNG prices have diverged dramatically from oil prices, which they normally follow closely.

In real (constant price) terms, manufacturing has been the star performer since the advent of the pandemic, with prices relatively stable. We don’t get a breakdown from the ABS of which sectors of this industry are responsible for growth – whether it is mineral processing, sectors servicing the mining industry, or other manufacturing.

In summary, Western Australia is currently receiving boom levels of income from mining, both in terms of State Government royalties and in private-sector incomes. We have personally heard more than a few anecdotes about some very tidy bonuses being offered to mining-sector employees this year.

Mining revenues have underwritten strong public-investment growth and enabled Government-dominated industries such as health, education and public administration to grow strongly in real terms.

Because of COVID-related restrictions in travel, this income is being spent domestically, often in the housing sector.

The proprietor has undertaken substantial home renovations this year and has been told by a number of tradespeople that people are spending money on their homes that they normally would have spent on overseas holidays.

Demand is placing a strain on the sector’s capacity. Trying to get a tradie to do some work is not easy at the moment. Does anyone know a good paver?

The decline in constant-price value-added from the construction industry is something we can’t explain at this point. In State Final Demand Data (Table 30 here), seasonally-adjusted constant-price dwelling investment was up 2.4% in the September quarter 2021 compared to the September quarter 2019, business investment was up 9% and government investment up 26%.

Let us know if you have any ideas.

As an aside, construction value-added was 44% lower in real terms in 2020/21 than it was in 2012/13, the peak of the mining investment boom.

Mining is, at this stage, the gift that keeps giving.

But it has been a gift in nominal dollar terms, increasing our short-term incomes. This is great, but we haven’t been investing in new capacity, mining or otherwise, to cater for jobs when labour force growth resumes at some stage.

So how does this end, or does it end?

To be clear, this is not investment advice so please do not buy and sell anything based on what is below. We always encourage you to read our disclaimers here.

We don’t forecast anymore, so we’ll outsource the task.

In the short-run, Western Australian Treasury anticipates commodity prices, especially iron-ore prices, to fall dramatically over the next few years. This is shown in its recent Mid-Year Financial Projections Statement below.

Reference: Government of Western Australia, Mid-Year Financial Projections Statement 2021/22, p37.

Lower commodity prices will lower nominal mining value-added, which will automatically ‘diversify’ the Western Australian economy, although maybe not in the way we might want. That is, total nominal income will be lower.

Kind of like the way socialism tends to equalise incomes by making everyone dirt poor.

While not the major topic of this post, Western Australian Treasury forecasts a kind-of soft landing for the Western Australian economy, with low economic (GSP) growth, but also low labour force growth, and hence low unemployment and solid wages growth.

We don’t know if this will happen but we hope Treasury is right. We are, after all, good Western Australians and want to see our friends and family do well.

In the long-run, well, that gets hard.

How does a relatively small, sparsely populated economy, far from anywhere, with high mining sector-driven wages, make a living in the 21st century? Especially as the world is, at least in (climate policy) rhetoric if not yet in demand, moving away from our important energy exports.

That’s a topic for another post.

As to whether the Western Australian economy will diversify, we have no idea.

We do, however, predict with 100% certainty that a diversification strategy will accompany every new government for the remainder of this century.

Thanks for reading. We hope this was of interest.

If you have any comments, suggestions or corrections to our analysis then please contact us. This isn’t our full-time job and we generate Practical Economics content when we can, so we might not reply immediately, but we will get back to you.