Can Western Australia benefit from China’s expected stimulus response?

There is more than enough panic going around the markets right now to power a spacecraft to Mars if the speed at which toilet paper and other essentials disappear off the shelves is any indication.

In fact, the Organisation for Economic Co-operation and Development has warned that real global gross domestic product (GDP) – a measure of the size of an economy – growth in 2020 could fall from its previous 3 per cent forecast, before COVID-19 hit, to 1.5 per cent.

However, Western Australia might enjoy some relief thanks to its reliance on exports to China.

While the irony that reliance on the same country where the virus originated could well be to WA’s benefit is so thick that it can be cut, Deloitte Access Economics says industry in China appears to be rebooting as COVID-19 becomes more contained.

“Most of our exports to China are iron ore, so in the short term we will rise and fall on the commodity price,” Deloitte partner Noel Richards said.

“The uncertainty related to the virus has exacerbated volatility in iron ore prices recently, but there is potential upside that might shield WA.”

Although Beijing has not announced a stimulus response to counter the effect of the virus on its economy, its direction of $US500bn ($810bn) towards capital investment in response to the 2008 financial crisis provides a strong hint of what’s to come.

“If the magnitude of the coronavirus stimulus package is anything like that, Australian exporters could expect stronger demand for steelmaking inputs including iron ore,” Richards explained.

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He added that while international trade was critical for the state’s economic growth, the largest part of the economy remained consumption by households.

Prior to the virus-induced panic, Western Australia’s household consumption grew by 1.4 per cent over the year to December 2019, up from 1.3 per cent in the previous quarter.

Labour market conditions also improved, with more than 26,000 jobs created in the state over the year to January 2020, representing year-on-year growth of 2 per cent.

“These trends make the timing of the virus outbreak unfortunate for WA, as sentiment seemed to be on the up late last year,” Richards added.

“Coronavirus now risks household consumption weakening, with the speed and scale of the global outbreak likely to weigh on consumer confidence.

“These are uncertain times, but remaining calm, measured and acting on the advice of authorities is the best medicine to containing the spread of the virus, and ultimately limiting the economic fallout.”

Richards noted that the state government might add to the Commonwealth’s $17.6bn stimulus package after it released a mid-year update highlighting a $1bn improvement in the budget surplus for 2019-20.

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“Importantly, WA Treasury continues to hold conservative forecasts of iron ore prices in future years, so if actual prices remain above those forecasts, this will boost the budget bottom line further, and improve the state’s capacity to support economic growth,” Richards said.

The WA government has since announced a $516m stimulus package aimed at providing relief to Western Australian families and small businesses.

This includes a freeze on any increase to household fees and charges, including electricity, water, motor vehicle charges, the emergency services levy and public transport fares until at least July 1, 2021, as well as a one-off grant of $17,500 for businesses that pay tax on a payroll of between $1m and $4m.