Growth puts premium on diversification

The 2024 world economic outlook from the International Monetary Fund has just been released and its forecasts for the global economy will provide illuminating reading for Western Australia’s economic planners.

The good news is that inflation seems to have stabilised globally and world supply issues are now almost resolved.

Inflation rates in most major advanced economies are expected to dip below 3 per cent by the end of 2024.

The IMF position aligns with projections in the recent federal budget, and could be a factor in whether the Reserve Bank of Australia gives the green light to drop its cash rate before the year’s end.

Household savings accumulated during the pandemic have been progressively melting away over the past year as families try to keep up with cost-of-living pressures, higher mortgage repayments and spiking rents.

If the IMF projections for inflation do eventuate, and there is any downward revision to the RBA’s cash rate, this would provide welcome respite to those households that have been doing it tough, especially given the progressive erosion in their resources and resilience.

However, the bad news from the IMF is that the global economic growth forecast five years from now sits at only 3.1 per cent: the lowest prediction in decades.

Much of this pessimism is due to the tightening of economic measures aimed at putting countries’ fiscal balances in order after the stimulus during the pandemic.

Another large contributor to the global economic slowdown is China’s expected growth.

China’s growth rate is expected to drop to 4.1 per cent by 2025, the slowest growth rate since the opening of the Shanghai Stock Exchange in the 1990s, and dip to only 3.3 per cent by the end of the decade.

This is the result of the slowdown of its housing and construction market that started in mid-2021 as a result of developer distress and a large stock of unfinished real estate projects.

And slow growth from China is bad news for WA.

About 85 per cent of WA’s iron ore exports go to China and stay in the country as an input into construction and infrastructure.

The slowdown in this sector is likely to put negative pressure on the price of iron ore, which will also weaken WA’s state finances.

On the other hand, gold prices are likely to be boosted as central banks stock gold amid global political tensions and uncertainty in the outcome of the upcoming US elections.

The price of metals and critical minerals necessary for the global transition to net zero is expected to increase as China and other developed economies decarbonise.

This will counterbalance the fall in iron ore price, but only to a limited extent.

So what can WA do?

First of all, WA needs to navigate the increased geopolitical fragmentation carefully.

Trade diversification should be a top priority.

WA is still putting many of its eggs in the same basket, and with China’s slowdown it is more important than ever to diversify our trading partners.

It’s important to strengthen our domestic economy and, with budget surpluses and a healthy fiscal situation, there is room for investment.

Investments should support the state’s long-term strategic plan to diversify and complexify its economy, but should also be guided by WA’s aspirations to hit net zero by 2050.

Only a strong domestic economy and a balanced number of trade partners will provide WA with long-term stability and the favourable terms of trade it needs to hit these targets.

• Dr Silvia Salazar is a senior research fellow at the Bankwest Curtin Economics Centre