The Western Australian economy has had its fair share of knocks and shocks over 2014, with more likely to be expected during 2015. But is WA isolated or any different from the rest of Australia?
WA is confronting the perfect storm where macro- and micro-events are combining to wreak havoc on both the public and private business sectors. The initial commodity price shock, combined with the subsequent and inevitable devaluation of the Australian Dollar, has left mining-related companies with no alternatives but to react through spending cuts and massive levels of redundancies. All in order to preserve their balance sheets and reduce costs.
The WA government’s public sector has also reacted strongly to falling revenue driven primarily by iron ore mining royalties to target spending reductions across government. This has been actioned under the guise of the cleverly-worded ‘efficiency dividend’ or via budget cuts across all departments. In the unlikely event that the federal government comes to the rescue, the WA public and private sectors will have to make significant structural adjustments to ride out another resources industry-led boom and bust cycle. This leaves WA businesses in the unenviable position of managing reducing levels of available cashflow within a high risk environment of increased business failure and decreased confidence.
The banks also have a role to play in stimulating growth through increased lending to business, however the bank boards would see this strategy as counter-intuitive in the current environment where global growth is faltering. In reality, lending to Australian businesses struck a 13 month low in November 2014 (down 2.6%). This is another sign that the WA economy is struggling to rebound, even taking into account the encouragement of Interest Rates at record lows. Alternative finance products which are counter-cyclical are readily available and can support business continuity during downturns in the economy. In fact, these counter-cyclical products such as Factoring and Debtor Finance have grown at double digit rates year-on-year in the 6-7 years since the onset of the GFC. This compares favourably to flat business lending from banks over the same period.
Whilst the WA economy has enjoyed the benefits of a massive investment in its backyard over recent years, so has the rest of Australia shared in the multiplier effects of the boom. Nevertheless WA business is now on its own in managing risks and challenges in 2015.
Some of these challenges, such as funding certainty, are manageable as there are now many cashflow finance alternatives available in the market to navigate the gloom in 2015.
