No uniformity to trade development

A Distinguished economist has painted a rosy picture of economic growth opportunities for Western Australia, but warns that capitalising on the predicted boom in the Indian economy will be entirely different from the Chinese experience.

The warning is predicated on the fact that India is not building its growth on manufacturing as China is, but primarily on establishing a technology-based services economy that will compete with Australia’s services sector.

Executive director of the Melbourne Business School’s Centre for Business and Public Policy, Ian Harper, predicts a 7 per cent annual rise in WA’s gross state production (GSP) from this year to 2006-2007.

The next best performer is Queensland with 4.8 per cent growth, followed by Victoria’s 3.5 per cent and NSW at 3.1 per cent.

Mr Harper told a recent Ernst & Young business forum that: “These are possibly the best economic conditions in living memory. If you guys can’t make money under these conditions, then someone ought to take you outside and horse whip you.”

The mining/resources industry will continue strongly, according to Mr Harper.

“It’s taken time for the miners to build up their capacities and infrastructure, but they are now pretty much on line for strong growth over the next three years.”

Mr Harper said the pressure points to this scenario included a slowing in gross domestic product growth through the remainder of this year, but an improvement in 2006 as housing slows, the Australian dollar weakens, and US interest rates rise towards the level of Australia’s.

“But I don’t see a change in Australian interest rates in the next 12 months,” he said.

The international economic outlook is also good, with the International Monetary Fund predicting 4 per cent growth this year.

“The biggest risk is the US economy,” Mr Harper said.

Issues that could affect growth include: a sudden fall in the US dollar, requiring a sharp rise in interest rates; a slowing in the US housing market and/or rise in US saving rates; and oil prices rising through $US80 a barrel.

Mr Harper said the US economy was growing quickly mostly because of low-cost imports from China, which were being paid for with US dollars, thus adding to China’s increasing investment in the US economy.

“The fear is that Chinese investment will slow, thus slowing the US economy,” he said.

The major problems for China, Mr Harper said, were inflation, despite the recent modest revaluation of the Chinese currency, and the country’s political system.

“Inflation would cause the Chinese Central Bank to increase interest rates to slow the economy. As China’s economy inflates, Chinese manufactured goods won’t be as cheap and become less competitive, leading to a massive current account deficit,” he said.

But Mr Harper rules out any floating of the Chinese current in the short term.

“The Chinese banking system is just not up to it. It is not sophisticated enough.”

The Chinese have a socialist political system and a democratic market system and “the two are heading for a collision of some sort.”

India, on the other hand, is a democracy and there is no clash between the economy and its political leadership.

“Any of these issues could bring Chinese development to a halt, but I don’t see it happening quickly,” Mr Harper said.

And while Australia’s trade was at historically high levels, pushed on by high commodity prices, India presented an altogether different set of circumstances.

“The Chinese buy them (commodities), turn them around and send them back to us at historically low prices,” Mr Harper said. “But the same will not be true with India, because the growth there will be in the services sector – technology, IT, call centres etc – not in manufacturing as with China. So India is likely to cause our services sector some grief.”

However, outsourcing these services by Australian companies could reduce costs, making them more competitive, he said.