What’s over the horizon for Western Australia? has been saved
What’s over the horizon for Western Australia?
12 April 2017: What if China’s rise is temporarily ‘trumped’? Would that tip Australia into recession, sending unemployment soaring and house prices plunging? And where would it leave Western Australia?
Let’s be clear – bad stuff can happen. But fear of the future is corrosive. The answer to rising uncertainty doesn’t lie in pretending the future won’t be disrupted. Chances are it will. Rather, the answer lies in shedding as much light as we can on the darkness cast by uncertainty.
Don’t be scared. Be prepared
‘China stumbles’ is just one of the three potential scenarios detailed in Deloitte’s latest Building the Lucky Country series report. What’s over the horizon? Recognising opportunity in uncertainty urges us to be less fearful in the face of uncertainty and to actively scan possible paths for the future.
As Cindy Hook, Deloitte Australia CEO noted: “Taking the time to scan the horizon is among the most valuable investments that businesses, governments and families can make. As business leaders and as a nation, we owe it to ourselves to think through plausible ‘what ifs’ and weigh up what they might mean.”
Michael McNulty, Deloitte Western Australia Managing Partner added: “This state has seen a bigger drop in business investment than any other in recent years, and it would be a mistake to let uncertainty continue to weigh too heavily on our future decisions, leading to lost opportunities. We can do better than that.”
Deloitte Chief Strategy Officer and report author John Meacock said: “What’s over the Horizon? will help business leaders shine a light on uncertainty and turn it to their advantage. Understanding the impact of ‘what ifs’ on their industry and business is essential. What’s over the Horizon? provides an opportunity to scenario plan using better information and tools to prepare for the future.”
What’s over the horizon? uses the new Deloitte Horizon model to explore three plausible futures:
- What would happen if troubles in China sent Australia lurching into recession?
- What would Australia look like if we successfully slipstream Asia’s new booms?
- Or what would Australia look like if we get better at being ‘cyber smart’?
To be clear, none of these three scenarios is the ‘most likely’ outcome for Australia. But they’re all plausible. And unless decision-makers in Australia and around the world start to be better at assessing risks and opportunities, it is likely that our future will underperform its potential.
Scenario 1: What if China tips Australia into a recession – hitting our housing?
Australia’s gains from our relationship with China have been huge, but equally our dependence on China is also huge, and our vulnerability on that front has risen significantly over the past decade.
Report author and Deloitte Access Economics partner, Chris Richardson said: “Australia doesn’t have the defences we had back in 2008 and 2009 – we lack firepower in interest rates and the Budget. And unlike what happened in the GFC, China would be part of the problem rather than part of the solution. So this scenario would bring recession here, and hit housing too.”
By 2019-20 that would leave Australia with half a million fewer jobs, and the better part of a trillion dollars wiped off our wealth as housing prices fell 9% and the share market dropped 17%. Business profits would drop by 19% and sales by 8%, while the $A would drop 15 cents against the $US.
Where would that leave Western Australia? Feeling some pain
States with great resource sector strengths – such as Western Australia and Queensland – have been huge beneficiaries of the rise of Asia in decades past, and that will continue to be true into the future.
But that ability to surf Asia’s growth comes with a matching vulnerability to Asia’s business cycles.
So there’s no particular surprise that WA – alongside Queensland – would be the hardest hit region in Australia if this scenario eventuated assuming the current economic structures. The slowdown in China’s economy since 2011 has already taken a toll on this state, and a sharper slowdown would deepen that pain by slowing construction and maintenance in the energy and resources sectors in particular, and leading to a wider drop off in construction.
As McNulty noted: “Western Australia has been a massive beneficiary of the rise of Asia, but that could also contain risks for the state were the Chinese economy to stumble. And this is where we need to be well prepared for such scenarios: while they aren’t likely, they could have a significant impact.”
Scenario 2: What if Australia successfully surfs Asia’s third wave?
The best and brightest future for Australia is essentially ’more of the same’ as we ride Asia’s boom to a better future, and as we have the courage to adopt much needed economic reforms.
“In many ways this scenario is simply history on steroids,” said Richardson. “The siren call of the populists currently dominating the global electoral landscape would have to be defeated. Politicians would have to act with courage and determination to deliver reforms, both in Asia and here at home. But, if achieved, the maturing boom in Asia would see the region’s rising middle class consumers power a new set of opportunities for our nation, generating a range of potential growth sectors.”
WA would share in the benefits of renewed booms in Asia and reforms here at home
Given the last decade-and-a-half, you might think that an ‘Asia succeeds’ scenario is one in which Western Australia would excel relative to other states.
And we in the West would indeed benefit, but perhaps less than you might think. Partly that would be due to:
- The impact of our federation in action (with mining states getting a smaller share of GST and other revenues as a result of a mining boom, and with tax cuts financed by any boom applying nationally)
- Western Australia’s dependence on NSW and Victoria for imports, as opposed to China or Japan
- Lastly, it is also because Asia’s success would add to Australian incomes, and those higher Australian incomes would tend to be spent on services – with NSW and Victoria again home to much of this nation’s service sector providers.
Even so, there are still notable gains here: WA would leverage its existing strengths in energy and resources in this scenario, and top that up with gains in tourism and agribusiness.
The Australian economy would see more than $800 billion is added to national income across the next two decades. And that bigger pie would be shared: wages lift by 1.8% more than prices, and there’s 1.6% more jobs, while a lift in profits and prospects encourages businesses to invest 5.7% more in future capacity.
As McNulty put it: “Western Australia has been Australia’s most successful economy for some decades – however future opportunities coming from Asia look different and we may not perform as well relative to states that have performed less well in times past. Even so, this is a scenario in which the incomes earned in Western Australia would jump by more than an extra $120 billion between now and the mid-2030s. And the challenge for Western Australia, having this knowledge, is how we might better position for these new future growth opportunities.”
Scenario 3: What if Australia goes cyber smart – and invests with confidence?
Digital opportunities and cyber risk go hand in hand. We live in an increasingly digitised world, but the enormous benefits generated by that also bring cyber risks. This means the very technologies with the greatest potential to turbocharge our future prosperity are those that we are often less willing to pursue.
Richardson said: “Cyber risk – and our responses to it – epitomise the point we’re making in this report. Uncertainty generates corrosive costs, but this scenario sees Australian businesses, organisations and families better address cyber risk, thereby freeing themselves up to invest with greater confidence.”
The scenario is one that would free up investment in valuable technologies in this nation, lifting business investment by 5.5%, and adding 60,000 net new jobs to the economy over the next two decades.
As McNulty noted: “Western Australia has had considerable success in selling rocks and crops to the world. But this scenario is about selling smarts, and it is a wake-up call on the importance of widening the state’s economic base in the years to come.”
It is only by understanding how risks and opportunities will affect the economy that businesses and policymakers can properly prepare for the inevitable uncertainty that the future will bring.
About Deloitte Horizon
Horizon marks a first – Deloitte has ‘industrialised’ strategic scenario analysis, providing a range of scenarios for the future, covering economic, technological and regulatory outcomes, and flowing those through to detailed views across each of 56 industries and eight states and territories.
About Building the Lucky Country
Deloitte’s Building the Lucky Country series was launched in 2011 and has been developed to prompt debate and conversations across business and government on issues facing the Australian economy. The five previous reports are:
- The purpose of place: reconsidered (2015)
As Australia transitions to a knowledge-based service economy, and looks to deliver a prosperous future for its people, unlocking the potential of the nation’s places needs to be reconsidered.
- Get out of your own way: Unleashing productivity (2014)
Australia is a lucky country, with a bright future. But we have a problem – and its colour is red. Red tape, that is.
- Positioning for prosperity? Catching the next wave (2013)
Where will Australia’s future growth come from? How can business and government leaders make the right decisions to position for prosperity?
- Digital disruption: Short fuse, big bang (2012)
Australia’s business and government leaders don’t need to look far into the future to see the new wave of digital disruption headed towards them. It is already here.
- Where is your next worker (2011)
Australia's problem in coming years won’t be a lack of jobs – it will be a lack of workers...
Find out more and register now to receive your copy of the latest Building the Lucky Country series report, What’s over the horizon? Recognising opportunity in uncertainty.