STATE HANDBOOK: WESTERN AUSTRALIA MARCH 2017

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CONTENTS 2 | Key points 3 | In Focus: Impact of surging commodity prices 4 | Consumer & household sector 5 | NAB Consumer Spending Behaviours 6 | Business sector 8 | Labour market 9 | Demographics 10 | Residential property 11 | Fiscal outlook & semi market 13 | Economic structure and trade 14 | State Forecasts

CONTACTS

James Glenn Riki Polygenis Skye Masters Senior Economist Head of Australian Economics Head of Interest Rate Strategy +61 (0) 455 052 519 +61 475 986 285 +61 2 9295 1196 james.glenn@nab.com.au +61 3 8697 9534 skye.masters@nab.com.au riki.polygenis@nab.com.au

CHART 1: STATE GSP GROWTH FORECASTS Annual growth

CHART 2: STATE FINAL DEMAND GROWTH Per cent

Source: ABS and NAB Group Economics

KEY POINTS • The mining cycle continues to dominate economic trends in WA, although the unexpected

partial rebound in commodity prices since last year adds to the uncertainty around the outlook. The most recent state National Accounts indicated that WA experienced fairly modest growth of just 1.9% in 2015-16, despite seeing a very strong contribution from net export volumes. Meanwhile, state final demand in WA was down almost 9% over the year to H2 2016. Additionally, more timely partial indicators suggest that conditions in WA remain quite challenging, although there have been some signs that the worst of the downturn may be behind us. Overall, we expect real GSP growth in WA to remain subdued at just ½% in 2016-17, down from rates of over 5% p.a. in past years (2011-12 through 2013-14). A ramping-up in LNG exports will make a very large contribution to growth thereafter (Charts 1 & 2).

• While the partial rebound in commodity prices last year will provide some assistance to the economy, and particularly government finances, NAB’s assessment is that the overall impact on the economy will be fairly minimal and temporary. Iron ore prices are expected to drop back to mid US$60s per tonne by end 2018 as Chinese demand pulls back in a well-supplied market. Additionally, ample capacity and a desire to pay down debt suggests that much of the windfall to mining revenues will not find its way back into the local economy.

• Business investment has been one of the primary drivers of weakness in domestic demand as construction rates wind down on major mining projects. The mining investment downturn is now well progressed, but more falls can still be expected as the handful of remaining LNG projects finish up. Non-mining sectors have yet to step in to fill the void, and forward indicators of investment suggest that is unlikely to happen any time soon. Business conditions are still extremely weak in WA, with the weakness relatively broad-based across the economy.

• The local housing market is still feeling the strain from economic headwinds, with property prices falling again in 2016, although there have been signs that the market may soon stabilise. However, with more adjustment still to come in the labour market, property prices are expected to underperform again in 2017. Similarly, dwelling investment will remain weak.

• Despite the negative wealth effects, some of the consumer trends have been a little more encouraging, including a lift in consumer sentiment and tentative signs of a positive shift in spending behaviours. But a weak labour market and softer population growth pose a significant constraint on consumption. The situation is not expected to improve, with the unemployment rate expected to stay around current levels before seeing only a gradual improvement.

• Higher commodity prices contributed to a near-term improvement in the State Governments financial positions according to the recent mid-year update. Higher royalty income will more than offset other drags on revenue in the near-term, but revisions to GST relativities worsen the position further out – halving the previously projected surplus for 2019-20. There is, however, some upside risk in the out years given our view of iron ore prices.

0

1

2

3

4

5

6

7

NSW VIC QLD SA WA TAS NT ACT2013-14 2014-15 2015-16 2016-17 (f) 2017-18 (f)

-15

-10

-5

0

5

10

15

20

Sep-89 Sep-93 Sep-97 Sep-01 Sep-05 Sep-09 Sep-13

WA Australia

State Final Demand Growth

-

IN FOCUS: Commodity price surge will provide only temporary relief for WA

per year to mining revenues (relative to if prices returned to their previous low).

However, we are not yet convinced that there will be a lasting positive impact on the WA economy. In particular, our assessment of market fundamentals suggest that current prices are likely to be unsustainable (see Minerals & Energy Outlook) – which is broadly in line with the consensus view of analysts. Our forecast is for prices to head lower over the next two years as Chinese steel production declines and iron ore producers utilise their capacity (Chart 3). The iron ore spot price is expected to hit US$75/t in late 2017, before ebbing to US$65/t by end 2018.

Additionally, if current prices are viewed as unsustainable, producers are unlikely to utilise revenue windfalls to invest in new capacity – a major source of domestic demand and employment growth in the previous cycle. If this were to change, an early indication would come from mining exploration spending. However, available data suggests that expenditure on iron ore exploration has remained quite low (Chart 5). Capacity utilisation rates in the mining sector have also remained quite low, albeit rising recently, providing yet another disincentive to mining investment.

Finally, many mining firms have expressed an intention to use any windfall to help reduce levels of debt accumulated over the course of the mining investment boom. Given the high degree of foreign capital used in the sector a significant share of profits will likely find its way overseas (not contributing to the domestic economy).

Source: ABS, Bloomberg, NAB Business Survey, NAB Group Economics

Bulk commodity prices saw a surprise rally in 2016, with iron ore prices almost doubling (Chart 3). While prices are still well down on previous peaks, any changes can potentially have significant implications for the WA economy – iron ore prices have previously had a positive correlation with WA SFD (Chart 4). The impact on royalty revenue is also significant to Government finances (see slide 10).

But what flow on effects will there be the WA economy this time around? Certainly, there are some encouraging signs emerging with reports that previously shuttered operations are being reopened. Also, based on estimates of the states iron ore export volumes, if recent price gains are sustained they would add almost US$40b

CHART 3: IRON ORE PRICE & FORECASTS US$ per tonne

CHART 4: STATE FINAL DEMAND & IRON ORE PRICES Year-ended Growth; US$ per tonne

3

CHART 5: MINING CAPACITY UTILISATION RATE & EXPLORATION Per cent, $ million

0

50

100

150

200

2000 2003 2006 2009 2012 2015 2018

Iron ore contract price (ends 2014)

Spot Price

0

40

80

120

160

200

-10

-5

0

5

10

15

20

2008 2010 2012 2014 2016

US$/t

State Final Demand Growth (lhs)

Estimated Iron Ore Contract Price (rhs)

%

70

75

80

85

90

95

0

50

100

150

200

250

300

350

2000 2001 2002 2004 2005 2007 2008 2009 2011 2012 2014 2015

%

WA Iron Ore Exploration (lhs)

Mining Capacity Utilisation (rhs)

$m

-6.0%-3.0%0.0%3.0%6.0%9.0%

12.0%15.0%18.0%21.0%

Mar-95 Mar-98 Mar-01 Mar-04 Mar-07 Mar-10 Mar-13 Mar-16

Total Compensation of EmployeesHousehold Consumption (nominal)

CONSUMER SPENDING: Wealth effects are still a drag, but consumers appear less anxious

play out, and while recent commodity price gains may help to cushion some of the impact, the effect is expected to be temporary and not fully offsetting. Additionally, property prices are forecast to record further (albeit more moderate) declines this year, while population growth will stay weak – a reflection of the deteriorating labour market. Consequently, consumption can be expected to remain very subdued for a while yet.

The Q4 2016 NAB Consumer Anxiety Survey showed a lift in consumer sentiment and (perhaps surprisingly) had close to the least anxious consumers relative to other states (behind Tasmania). That seems at odds with some of the negative economic trends, although recent signs of stabilisation and higher commodity prices may be helping sentiment. Spending behaviours still largely reflect what you would expect from cautious households – with a focus on reducing debt and spending on essentials – but there have been signs of more positive behaviour of late (Chart 8).

Source: ABS, NAB Group Economics 4

While growth in household consumption has stayed subdued in WA, rising just 1.9% over the year to Q3 2016, momentum did seem to improve over 2016 – following a very weak outcome in late 2015. That said, nominal growth has continued to weaken given the effect of competition and the low demand environment on prices. Population and labour market trends in WA remain quite poor (but stabilising), which is limiting wage growth and aggregate consumer demand. The property market is also doing no favours, having a negative impact on household wealth (Chart 7).

The full extent of the labour market adjustment (post-mining boom) is yet to fully

CHART 6: NOMINAL COMPENSATION OF EMPLOYEES AND HOUSEHOLD CONSUMPTION GROWTH Year-on-year percentage growth

CHART 8: NAB CONSUMER ANXIETY SURVEY - CONSUMER SPENDING PREFERENCES Changes in Consumer Spending Preferences (net balance)

CHART 7: RETAIL TURNOVER AND HOUSE PRICE GROWTH Year-on-year percentage growth

-2%0%2%4%6%8%10%12%14%16%

-8%-2%4%

10%16%22%28%34%40%46%52%

Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15

Perth house price growth (Y-o-Y%)Retail turnover growth (Y-o-Y%)

-40.0000

-30.0000

-20.0000

-10.0000

0.0000

10.0000

20.0000Entertainment

Eating out

Major HH items

Charitable donations

Personal goods

Travel

Home improvements

Use of creditGroceries

Savings, super,investments

Children

Transport

Medical expenses

Utilities

Paying off debt

Q3'16 Q4'16

NAB CUSTOMER SPENDING BEHAVIOURS: Spending growth in regional areas stronger than in metropolitan WA

Source: ABS, NAB Group Economics 5

NAB’s customer transaction data allows for a more granular look at spending behaviours across regions in WA.

By postcode, customer spending growth in the Perth metro region was fastest in Trigg 6029 (20.2%), North Fremantle 6159 (15.9%) and Mosman Park 6012 (9.6%). In Regional WA, spending was fastest in Dampier 6713 (38.3%), Gnowangerup 6335 (36.0%), Burekup 6227 (34.7%), Port Hedland 6706 (34.4%) and Moora 6510 (31.4%).

Spending was fastest for Accommodation, Cafes, Pubs & Restaurants in both the Perth metro area (8.9%) and in Regional WA (11.8%).

CHART 9: GREATER PERTH METRO AREA Year-ended growth to Q4 2016

CHART 11: REGIONAL WA (EX METRO) Year-ended growth to Q4 2016

CHART 10: TOP 20 FASTEST GROWING SUBURBS FOR SPENDING Metro

CHART 12: TOP 20 FASTEST GROWING SUBURBS FOR SPENDING Regional NSW

Overall Growth -0.4%

Average Monthly

Spend (Q4) $2,183

Overall Growth

0.7%

Average Monthly

Spend (Q4) $2,018

20.2

%

15.9

%

9.6%

8.5%

8.3%

7.5%

6.1%

5.1%

4.7%

4.1%

4.0%

3.6%

3.4%

3.4%

3.1%

2.5%

1.8%

1.7%

1.6%

1.5%

0%

5%

10%

15%

20%

25%

Trig

g

No

rth

Fre

man

tle

Mo

sman

Par

k

Serp

enti

ne

Lake

lan

ds

Hill

arys

Wes

t Le

eder

ville

Oak

ford

Bea

con

sfie

ld

Cla

rem

on

t

Wem

ble

y

Mo

rley

Att

adal

e

East

Per

th

Gle

n F

orr

est

Mo

un

t La

wle

y

Tho

rnlie

Dar

ling

ton

Bu

tler

Bec

ken

ham

6029 6159 6012 6125 6180 6025 6007 6121 6162 6010 6014 6062 6156 6004 6071 6050 6108 6070 6036 6107

Top 20 Postcodes by Spend Growth: Perth Metro(Q4 2016 spend value on Q4 2015 spend value)

38.3

%

36.0

%

34.7

%

34.4

%

31.4

%

26.4

%

21.9

%

20.3

%

18.1

%

17.4

%

15.8

%

14.3

%

13.8

%

12.9

%

12.8

%

12.7

%

11.4

%

11.3

%

11.3

%

10.6

%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Dam

pie

r

Gn

ow

ang

eru

p

Bu

reku

p

Port

Hed

lan

d

Mo

ora

Co

olg

ard

ie

Jerr

amu

ng

up

Rav

enst

ho

rpe

Hal

ls C

reek

Cu

bal

ling

Gre

en H

ead

Wag

in

Min

gen

ew

Dal

wal

linu

Mu

llew

a

Bak

ers

Hill

Yar

loo

p

Kel

lerb

erri

n

Bo

uld

er

Wal

kaw

ay

6713 6335 6227 6760 6510 6429 6337 6346 6770 6311 6514 6315 6522 6609 6630 6562 6218 6410 6432 6528

Top 20 Postcodes by Spending Growth: WA Regional(Q4 2016 spend value on Q4 2015 spend value)

74

76

78

80

82

84

86

88

1989 1992 1994 1996 1999 2001 2003 2006 2008 2010 2013 2015

WA Total

BUSINESS CONDITIONS: Most industries continue to report weak conditions, while spare capacity is elevated

Investment intentions from the NAB Survey have been trending lower, although they have been surprising resilient given the headwinds from the mining sector – perhaps reflecting the survey’s emphasis on non-mining industries (Chart 12). Nevertheless, intentions remain below the historical average, albeit not as weak as suggested by the ABS Capex Survey (slide 7, Chart 19).

Most industry groupings are showing quite soft business conditions, although confidence appears somewhat more mixed. Manufacturing appears to be the best performer, which is unusually given the structure headwinds facing the sector (Chart 16).

The post-boom downturn in mining investment continues to play out across WA, contributing to very weak business conditions that are having a negative impact on most industries and sectors of the economy in one way or another.

Consistent with what you would expect at this stage in an investment boom/bust cycle, the NAB Business Survey is showing relatively elevated rates of spare capacity for firms in WA – capacity utilisation is below the national average (Chart 10). Similarly, business conditions are negative and have been the lowest of all the Australian states for a number of months (Chart 15).

CHART 13: NAB BUSINESS SURVEY – CAPACITY UTILISATION Per cent of full capacity

CHART 15: SPREAD IN NAB BUSINESS CONDITIONS Net balance

CHART 14: NAB SURVEY CAPEX EXPECTATIONS & PRIVATE BUSINESS INVESTMENT GROWTH Net balance; Per cent growth

CHART 16: WA BUSINESS CONDITIONS & CONFIDENCE BY INDUSTRY Net balance, Q3 2016

-50-40-30-20-10

01020

Conditions Confidence

-70-50-30-101030507090110130150

-40

-20

0

20

40

60

80

100

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017

WA Capex Expectations (12-month, 6-month adv, lhs)

WA Business Investment Growth

-40

-20

0

20

40

-40

-20

0

20

40

2007 2009 2011 2013 2015 2017

Spread Total Western Australia

Source: ABS, NAB Group Economics 6

INVESTMENT: Investment outlook remains weak, especially in the mining and office segments

Similarly, the NAB Commercial Property Survey for Q4 2016 shows that office property conditions remain extremely weak, as is industrial property (Chart 20).

Expected capital expenditure (capex) by businesses (according to the ABS survey) suggests that mining investment in WA will continue to contract over the next 12 months, but at a slower pace (Chart 19).

Non-mining investment is considerably smaller and the ABS Survey provides no indication that a pick up is underway to help offset declines in mining.

There continued to be large falls in WA’s business investment as more major mining investment projects approach completion. Private business investment dropped 30% over 2016, despite a small rise in Q4. However, it is not only mining investment that has been subdued, with the ABS Capex Survey suggesting investment by ‘other selected industries’ has been flat to falling since mid-2012 (Chart 19).

More recently though, building approvals have been pointing to an improvement in some segments (although approvals tend to be lumpy) (Chart 17). There is, however, still quite significant slack in the office sector (Chart 18).

CHART 17: NON-RESIDENTIAL BUILDING APPROVALS Million dollars

CHART 19: WA CAPITAL EXPENDITURE & EXPECTATIONS Actual & expected based on previous realisation ratio ($billion)

CHART 18: WA OFFICE MARKET CONDITIONS Million dollars; Per cent of capacity

CHART 20: NAB COMMERCIAL PROPERTY INDEX - WA Per cent of responses

Source: ABS, JLL, NAB Group Economics

0

50

100

150

200

250

300

2000 2002 2004 2006 2008 2010 2012 2014 2016Retail/wholesale Offices Factories Warehouses Other

0

10

20

30

40

50

60

Mining Non-mining2012-13 2013-14 2014-15 2015-16 2016-17 (e) 2017-18 (e)

0

5

10

15

20

25

300

50

100

150

200

2005 2007 2009 2011 2013 2015 2017Office approvals Office vacancies

-120-100-80-60-40-20

020

Office retail industrialDec-15 Sep-16 Dec-16

7

LABOUR MARKET: Employment holding up better than expected, but probably not for long

while yet (Chart 22).

Over the past year, retail saw the biggest increase in employment, followed by the mining industry (Chart 23). The latter is a little surprising given the large contraction in mining investment, however this may reflect an increase in the labour-intensiveness of projects in the final stages (or simply volatility in the data) – mining investment is expected to fall further, which will likely see declines in mining employment going forward.

The labour market appears to be holding up a little better than expected, but the unemployment rate has continued to deteriorate (Chart 21). While slower population growth is assisting the unemployment rate, employment has also not deteriorated as much as expected, with only 2,500 jobs lost over the year to January.

Despite that, major mining (LNG) projects are getting close to completion, meaning that a large adjustment to the labour market can still be expected. Given the subdued labour market and outlook, wages growth will remain weak for quite a

CHART 21: UNEMPLOYMENT RATE BY REGION Per cent, nsa

CHART 23: CHANGE IN EMPLOYMENT BY INDUSTRY, WA Last 12 months, thousands

CHART 22: UNEMPLOYMENT RATE & NAB CAPACITY UTILISATION RATE Per cent

23456789

10

Jun-99 Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15

WA Greater Perth Rest of WA

70

75

80

85

90 0.5

2

3.5

5

6.5

8

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Wage Price Index (year-ended growth, rhs)

Capacity utilisation(inverse, lhs)

Trend Unemployment Rate(rhs)

-20 -10 0 10 20 30

Retail trade

Mining

Agriculture

Hospitality

Public admin

Utilities

Communications

Arts

Other services

Transport

Education

Finance

Manufacturing

Rental services

Wholesale trade

Business services

Admin services

Health

Construction

Source: ABS, NAB Group Economics 8

DEMOGRAPHICS: Population growth has dropped below the national average.

Population trends are consistent with observations from the labour market. While job gains in WA have slowed from the levels seen in previous years, it appears as though most of the losses over the past year were mainly jobs held by full-time Australian born workers. The flow of jobs has been somewhat mixed for other regions, but most regions saw a net gain in jobs over the same period (albeit mostly in part-time positions) – southern & eastern Europe being the main exception (Chart 26).

Sources: ABS; NAB Economics

A sharp pull-back in overseas migration and a reversal of interstate migration flows has seen WA’s population growth drop significantly in recent years (although is still positive). While the net interstate outflows are still picking up, overseas migration appears to have stabilised, helping to stem the strain on total population (Chart 24).

Nevertheless, population growth in WA has now dipped below the national average, having previously led the way for more than a decade (Chart 25). Timely estimates of civilian working age population also show growth below the national average.

CHART 24: WA POPULATION GROWTH Thousands, over the year

CHART 26: WA EMPLOYMENT BY COUNTRY OF BIRTH Thousands, over the year

CHART 25: WA POPULATION GROWTH Year-ended growth

-20

0

20

40

60

80

100

1982 1986 1990 1994 1998 2002 2006 2010 2014

Natural increase Net overseas migration

Net interstate migration Total population growth

-40 -30 -20 -10 0 10 20

Australia

New Zealand

NORTH-WEST EUROPE

SOUTHERN & EASTERN EUROPE

NORTH AFRICA & THE MIDDLE EAST

SOUTH-EAST ASIA

NORTH-EAST ASIA

SOUTHERN & CENTRAL ASIA

AMERICAS

SUB-SAHARAN AFRICA

OTHER

Change in number employed over 12 months (000's)

Full-time Part-time

0.00.51.01.52.02.53.03.54.0

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

WA AUS

9

-20

-10

0

10

20

30

40

50

2000 2002 2004 2006 2008 2010 2012 2014 2016

Perth Houses

Perth Units

Regional Houses

0

2000

4000

6000

8000

10000

1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

Approvals Commencements

HOUSING MARKET: Housing market still very weak, but the trough may be in sight.

Both commencements and approvals have fallen steadily from their past peaks (Chart 27), suggesting dwelling investment will remain subdued.

On a more positive note, the NAB Property Survey suggests a moderate improvement in price performance over coming years, although fundamentals may not support this view (Chart 28). NAB expects Perth house prices to continue with a trend decline in 2017; forecast to fall 2.7% in 2017 (apartment prices down 3.8%). This years increase in the states FHOG is also not expected to provide much boost given soft fundamentals.

Prices have been falling across most property types and regions (Charts 29 & 30). For the metro area, house prices in the east have fallen the most.

Source: ABS; CoreLogic; NAB Economics

Market conditions remain tough in WA, but there are some signs that the downturn could soon reach its trough. For now though, slower population growth, a weak labour market and a less than favourable supply environment have taken a toll on the WA housing market. Perth property prices have been the consistent worst performing relative to other capital cities, with prices falling 4.2% over 2016.

Regional prices have tended to perform even worse than the capital city, reflecting the influence of the mining sector (Chart 29). The areas within closer proximity of mining operations (such as the Pilbara) have been hit particularly hard. The impact on dwelling construction has been very apparent, falling in each of the five quarters to Q4 2016 – dropping more than 20% over 2016.

CHART 27: WA RESIDENTIAL APPROVALS & COMMENCEMENTS Per cent

CHART 29: WA RESIDENTIAL PROPERTY PRICE GROWTH Per cent

CHART 28: NAB SURVEY – HOUSE PRICE EXPECTATIONS Per cent

CHART 30: PERTH - MEDIAN PROPERTY PRICE GROWTH Year to Q3 2016

-8 -7 -6 -5 -4 -3 -2 -1 0 1

Central Metropolitan

East Metropolitan

North Metropolitan

South East Metropolitan

South West Metropolitan

House Prices

Unit Prices

-4.0

-2.0

0.0

2.0

4.0

Q1

'11

Q2

'11

Q3

'11

Q4

'11

Q1

'12

Q2

'12

Q3

'12

Q4

'12

Q1

'13

Q2

'13

Q3

'13

Q4

'13

Q1

'14

Q2

'14

Q3

'14

Q4

'14

Q1

'15

Q2

'15

Q3

'15

Q4

'15

Q1

'16

Q2

'16

Q3

'16

Q4

'16

Ne

xt Q

trN

ext

12m

Ne

xt 2

y

Australia WA

ExpectationsEstimated price growth in relevant survey period...

10

FISCAL POSITION: Deteriorating further on weaker economy and commodity prices

(although the associated positive pressure on the AUD will provide some offset).

Infrastructure spending is expected to make a positive contribution to the economy in the next two years - more than half the contribution is to come from public corporations, while a total of $22.3 billion to be invested between 2016-17 and 2019-20 under the state’s Asset Investment Program. Nonetheless, public infrastructure investment over the forward period was revised down $522m relative to Budget (with the biggest cut coming from the Public Transport Authority.

Excluding the impact of potential new asset sales, total public sector net debt is now forecast to be $483 million lower at $39.7 billion by 30 June 2020, down from $40.2 billion forecast at Budget-time.

Source:: WA State Budget; NAB Economics

The most recent mid-year state Budget update for 2016-17 showed that the fiscal position has improved largely as a result of iron ore prices, offsetting a number of negative factors – including weaker payrolls tax and transfer duty revenues, as well as delays in Commonwealth infrastructure funding.

By the end of the forward estimates, however, the impact of higher iron ore prices are more than offset by lower GST grants, reflecting a reduction in Western Australia’s GST relativity. The anticipated operating deficit for 2016-17 was revised down by more than $500m, to $3.4b, with the balance expected to return to modest surplus by 2019-20 (albeit roughly half the surplus expected at the time of Budget).

Revenue estimates for 2016-17 have been revised up $832m, largely in response to higher commodity prices, but also with the assistance from a lower AUD and some upward revision to commodity sales volumes. For the period 2017-18 to 2019-20, royalty revenue was revised up by $2.4 billion to reflect higher iron ore prices. However, the Budget iron ore price assumption is around $US5-15 per tonne lower than NAB’s forecast in the out years (page 3)– Budget sensitivities suggest at least a $365m-$1.1b boost to royalties revenue per annum if NAB forecasts are correct

CHART 31: WA NET OPERATING BALANCE & ROYALTY INCOME Per cent of GSP

-2

-1

0

1

2

3

4

2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20

Royalty Income Net operating balance

Royalty income (at Budget)

CHART 32: WA ASSET INVESTMENT PROGRAM $ billion

11

0

2

4

6

8

2005-06 2007-08 2009-10 2011-12 2013-14 2015-16 2017-18 2019-20Public Corporations General Government Sector

SEMI GOVERNMENT AND CREDIT OUTLOOK: WESTERN AUSTRALIA Higher iron ore price reduces prospect of rating downgrade

WA’s rating outlook remains negative but recent gains in commodity prices have reduced the chances of a rating downgrade.

Following the MYBR, WATC’s funding program for FY17 was revised lower to $6bn from $7.15bn. As at the end of February WA was 100% through its 2016-17 funding program.

Source: WATC

12 State Update: Western Australia

Capex at the broader state level (NFPS) is expected to be fairly steady at around $5-6bn pa. Ongoing fiscal deficits will keep net debt rising throughout the forecast period, from $36.7bn to $43.9bn by 2019-20. Proposed asset sales, such as Western Power, are not included in forecasts and if the Labor party wins at the upcoming election Western Power is unlikely to be sold. The PFPS showed a $1.1bn deterioration in debt over four years. Most of the deterioration reflects the roll-out of NDIS scheme.

CHART 33: WA NON-FINANCIAL PUBLIC SECTOR NET DEBT CHART 35: S&P CREDIT METRIC: BUDGET PERFORMANCE METRICS

CHART 34: WATC BORROWING PROGRAM CHART 36: WATC TERM BONDS OUTSTANDING

Source: WATC

Source: WA budget paper Source: WA budget paper, NAB

0

5

10

15

20

25

30

35

40

45

50

2015-16 2016-17 2017-18 2018-19 2019-20

$bn2016-17 MYBR

2015-16 MYBR

2015-16Budget

2016-17 Budget

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY15 FY16 FY17 (f) FY18 (f) FY19 (f) FY 20 (f)

AUDbn

Refinancing

New financing

Borrowing programme

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0AUDbn

Issuance as at 30 June 2016

Issuance FYTD

-15%

-10%

-5%

0%

5%

10%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Adj Operating balance as % of

S&P balance after capital

S%P Operating balance scoring threshold

Balance after capital ac as % total adjusted revenue

Budget 17

Budget 17

MYBR 17

Source: WA Budget

MYBR 17

PFPS Feb-17

PFPS Feb-17

EXTERNAL TRADE: Economic growth to be driven by net exports until around 2018-19

Source: ABS, NAB Economics

The once-in-a-generation mining boom has driven growth in mining and related industries including construction, bolstering their share of total economic output. However, a weak outlook for both mining investment and residential construction could unwind some of this share.

In contrast, the composition of employment is much more diverse, reflecting the relatively higher labour intensity of other industries.

Goods export volumes in WA continue to expand rapidly, supported by rising production of commodities. The trend is likely to continue as iron ore and LNG production ramps up towards full capacity in the coming year or so. In particular, LNG will quickly increase in importance to the WA economy as production capacity

CHART 38: WA NET TRADE Million dollars, 3mma

TOP EXPORT DESTINATIONS, WA Billion dollars, 12-month average

CHART 37: COMPOSITION OF EMPLOYMENT & GVA Percentage share

more than doubles. These trends will see more strong net exports contributions to GSP growth going forward, following on from a very impressive 4.8 ppts in 2015-16.

In the near term, a partial recovery in commodity prices is having an impact on incomes and nominal growth – nominal net merchandise exports have been picking up again (Chart 38). However, NAB’s assessment is that the 2016 rallies in commodity prices are largely driven by temporary factors and will reapproach their previous lows going forward. Iron ore prices are expected to return to the low US$50’s per tonne (CFR, spot) in 2018 – below state government assumptions in the out years.

0% 5% 10% 15% 20% 25% 30%

Agriculture

Mining

Manufacturing

Utilities

Construction

Wholesale trade

Retail trade

Hospitality

Transport

Communications

Finance

Rental services

Business services

Admin services

Public admin

Education

Health

Arts

Other services

Employment

GVA 0

2

4

6

8

10

1988 1991 1994 1997 2000 2003 2006 2009 2012 2015

$

S

Net Merchandise Exports(current price)

13

Value of exports ($m)

1 China 51250

2 Japan 13832

3 EU 9762

4 ASEAN 8511

5 UK 7485

6 HK 6681

7 Korea 6042

8 Singapore 2277

9 Taiwan 1584

10 Germany 1334

11 India 1318

12 US 119713 New Zealand 329

Value of imports ($m)

1 ASEAN 7269

2 EU 4112

3 China 4059

4 Japan 3674

5 US 2877

6 Singapore 1603

7 Korea 1295

8 Germany 890

9 UK 842

10 New Zealand 814

11 Taiwan 269

12 HK 179

FORECASTS BY STATE AND TERRITORY: WA growth rebounding moderately in 2017-18

Source: ABS, CoreLogicNAB Economics

NAB’s economic forecasts by state and territory are below. For a summary of the outlook by state, please see the States Handbook – Overview which contains links to the detailed handbook for each state and territory.

REAL GROSS STATE PRODUCT AND UNEMPLOYMENT RATE FORECASTS Annual average

14

HEDONIC HOUSE PRICE FORECASTS* Through the year growth to Q4

HEDONIC UNIT/APARTMENT PRICE FORECASTS * Through the year growth to Q4

NAB growth and unemployment rate forecasts for the states

14-15 15-16 16-17f 17-18f 14-15 15-16 16-17f 17-18fNSW 2.6 3.5 2.7 2.9 5.9 5.4 5.1 5.3VIC 2.6 3.3 2.7 2.9 6.4 5.9 5.7 5.7QLD 1.2 2.0 3.5 3.5 6.5 6.2 6.2 5.8SA 2.0 1.9 0.8 2.0 6.9 7.3 7.0 7.0WA 3.6 1.9 0.5 2.8 5.4 6.0 6.5 6.3TAS 1.3 1.3 1.0 2.0 6.9 6.5 6.5 6.5NT 2.0 2.7 1.5 5.0 4.2 4.2 4.0 4.8ACT 1.3 3.4 2.3 2.5 4.5 4.5 4.3 4.3Australia 2.4 2.7 2.1 3.0 6.2 5.9 5.7 5.7

Unemployment RateGross State Product YoY