Challenges for Western Australia’s economy but no repeat of 2008

The role for West Australian business leaders has never been more critical in evolving the state.

It has been a volatile start to the year for markets. Over the last two months there have been many comparisons to 2008. The first thing, and probably the most important observation I would like to leave with you is that 2016 is not a repeat of 2008.

While there are some similarities, given the recent repricing of assets and securities, the causes are very different, as are the longer- term implications. As with 2008, commodity prices have fallen dramatically and bank share prices have also come under pressure.

Unlike the global financial ­crisis, the recent depreciation in asset prices of commodity-based companies and bank share prices alike in part relate to reduction in demand from weaker global growth.

But in my opinion, 2016 relates to business model challenges and the realisation that we are in a new operating environment where business models have to evolve as traditional cost structures are ­tested by innovation — as much an opportunity as a risk for many businesses. A great example is Fortescue Metals Group, which has continually over­achieved in the evolution of its business model.

This new environment is ­innovation-led, a function of disruptive technology lowering costs challenging business models or, in the case of banks, disruptive technology with the added dimension of regulatory pressures and negative or zero interest rates.

Much has been said about China and the state of its economy. Given my role on Deutsche Bank’s China Board, I have spent significant time thinking about the state of play there.

This is particularly significant for Western Australia, given its strategic ties to China — an incredible 54 per cent of West Australian exports are to China.

There is no doubt that China is in a state of transition. The country is moving away from manufact­uring to services and, as with all transitions, there are unintended consequences that need to be managed.

We are at a point of intersection in China today where restruct­uring of many manufacturing sectors, given the clear overcapacity is what is required, needs to be balanced with social responsibilities of employment growth. The rebalancing towards service sector is the only path towards sustainable growth, but this will take time and the path will not be linear.

The clouds on the radar relate to the ever growing debt burden that needs to be managed in future years, and while I do not see this as an immediate issue, it is something that may yet prove to be very ­pervasive, but I doubt it’s a 2016 issue.

Given their strong links, the need to transition economies will apply equally to Western Australia and China if we are to retain our standard of living.

Notwithstanding the recent appreciation, we remain of the view that the commodity prices ach­ieved earlier this decade will not be repeated, and with royalties representing 40 per cent of WA’s revenue, the challenges to WA are obvious. The need to evolve is clear if WA is to avoid lower household incomes.

With this backdrop the timing, and more importantly the subject of today’s forum, is particularly important.

The role for West Australian business leaders has never been more critical in evolving the state to a more balanced economy, to one that will hopefully link its unique and natural advantages of resources and proximity to Asia.

Undoubtedly, linkages to universities and a steadfast focus on innovation are called for and will play an increasing role in the ­future.

The dialogue needs to shift from how cheaply we produce to how smartly we produce.

We need to leverage the ­expertise ­associated with the production of resources and mining services that have been foun­dations of this state’s economic wealth.

Michael Ormaechea is the chief executive officer for Deutsche Bank Australia and New Zealand. This is an edited extract of his comments at the The Australian and Deutsche Bank Business Leaders Forum.