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COVID creates two-speed economy and 'exacerbates' Western Australia's lack of economic diversity

Things were booming for Edward Schimmel's business pre-COVID. (ABC News: Keane Bourke)

Western Australia's path through COVID has created a two-speed economy, and problems facing the state's finances highlighted by the pandemic aren't going anywhere in a hurry.

Yes, it's true WA is heading for another record budget surplus and business is booming for some sectors, but lingering in the shadows are the crippling costs of the pandemic that are weighing heavily on others.

And even beyond the peak and eventual recovery, there will be other issues for the state's economy to confront.

At his warehouse — full of exhibition supplies sitting idle — Edward Schimmel knows the cost of the last two years better than many.

Edward Schimmel says he had his hopes pinned on 2022. (ABC News: Keane Bourke)

Mr Schimmel's company helps put on exhibitions and conferences — sectors that were booming before COVID hit.

"She [WA] was a destination to be looking at, but all of a sudden it's now having to build the confidence back up in the industry to say 'yes, we can handle it here in Perth,'" he said.

About 20 booked events vanished off the calendar when WA's border reopening was delayed.

Edward Schimmel says the long-term impact on is business is still to be seen. (ABC News: Keane Bourke)

And while some will return next year, it is possible others will be lost to states which opened sooner and gave event organisers the confidence to plan.

Bookings are starting to pick up for the second half of the year, and even as far out as 2024, but the long-term effects remain to be seen.

"We're feeling positive … but unfortunately, us in the industry have had two years of hell. It hurts, it really does," he said.

Eased restrictions not a panacea for business

Of the affected industries, hospitality, has been among the loudest voices calling for an easing of COVID restrictions.

And the latest retail trade data from February shows why – revealing a 3 per cent drop in WA since January, compared to an increase of 2 per cent for the nation as a whole.

Businesses have been hit hard by restrictions, especially in the CBD. (ABC News: Andrew O'Connor)

Research fellow at the Bankwest Curtin Economic Centre, Silvia Salazar, said there were a number of potential reasons for that – including restrictions, and increasing prices.

But she said eased restrictions were not a panacea.

"Company behaviours and people's behaviours, in some cases, [are] more important," she said.

Dr Salazar said the economy would likely remain divided for some time, with big industry dealing with labour shortages due to worker sickness, but unlikely to face the scale of issues facing others.

"But then [there is] this other sector that is extremely reliant on people going out and purchasing goods and services. Those are the ones who will suffer the most," she said.

New Sensation Homes, which was yesterday placed into liquidation citing rising costs and labour shortages, is another example of how economic pressures are taking their toll.

How long all of this continues on for will depend on when WA reaches the other side of its COVID peak.

Silvia Salazar says easing restrictions may help businesses, but there are other factors at play. (Supplied)

"If we can see that the end of the wave is coming then people are going to start coming out again, companies call their people back in."

Once that happens, the biggest factors affecting WA's economy will look more like those around the rest of the nation, including inflation.

Lack of economic diversity a big issue for WA

Before long, WA will be forced to grapple with an economy that remains heavily concentrated around mining.

As just one example of that reliance, mining accounted for 8.4 per cent of WA's employment in 2019/20. Nationally, that figure was closer to 2 per cent.

Western Australia's shadow treasurer, Steve Thomas, believes the state is not ready to face those challenges.

Steve Thomas doesn't believe WA is prepared for the economic challenges ahead. (ABC News: James Carmody)

"The McGowan government has a fortune in its coffers. It had a $5.8 billion surplus last year, and it is probably going to bear that this year.

"It's looking at $20 billion worth of surpluses over five years, and it has to use that money to assist people to survive increasing prices, increasing interest rates and making sure that they can get through this next stage."

Dr Thomas also suggested using record surpluses to engage in economic reform, such as payroll tax, to help smooth out WA's boom and bust cycles. 

"Most of the economic modelling will say if you reform payroll tax there's a resultant increase in employment, and that increase in employment ultimately starts to generate more wages and generates more payroll tax," he said.

Royalties from the iron ore price boom have helped boost the government's coffers.  (Reuters: David Gray)

"It's the lag period that has to be funded, and when you've got a massive surplus due to the iron ore industry .. that's the time that you can afford to do that."

But Dr Salazar said there were arguments for not lowering taxes.

"You want to be able to shelter yourself from price fluctuations, and you can do so by diversifying the industry," she said.

"In that sense, you might not always want to decrease the taxes, if that's what you want, because then you will say well, if we keep these taxes we have but then those taxes we invest smartly in other diversification opportunities."

Heavy reliance on China problematic

Both agreed though the biggest elephant in the room was still not being fully addressed by the state government, which benefits from overflowing coffers and also complete control of both houses of parliament, allowing unprecedented power to press ahead with its legislative agenda.

"In mining we're diversifying a bit in that we're moving towards rare earth, and that's very good," Dr Thomas said.

WA's economy has fared better than most throughout the pandemic.  (ABC: Simon Leo Brown)

"But we're not diversifying out of mining and that's the problem."

Some of these issues were noted by a state parliamentary inquiry, which recently handed down its report on the next 20 years of WA's economy.

In addressing the state's heavy reliance on iron ore, and particularly exports to China, it explained demand was likely to plateau over the next decade, potentially impacting the state's bottom line.

"While WA remained resilient during the COVID-19 pandemic, the state's lack of economic diversity has been exacerbated," the inquiry's chair, Peter Tinley, also wrote in the report.

China's need for WA iron ore is expected to plateau. (ABC News: Rachel Pupazzoni)

"High iron ore prices and increased iron ore exports to China, coupled with significant disruption to other export industries – such as international education, tourism and primary industries – have meant that the state's diversification agenda has been significantly hampered."

And given 80 per cent of WA's goods exports go to just five countries, the report suggested building stronger ties with Indonesia, Vietnam and India, which it said are likely to drive the next phase of growth in the Indo-Pacific.

The availability of many materials needed to make batteries, and the ability to generate solar and wind power, would also be important to leverage.

Decarbonisation key to future investment

Mr Tinley added that decarbonisation was "overwhelmingly driving the economic challenges and opportunities of the future".

He noted that WA, and Australia more broadly, needed to move towards decarbonisation quickly, to compete with the European Union in particular, which is further along that path.

"Providing confidence that WA has pathways to achieve its decarbonisation ambitions will be necessary in supporting the state to secure investment for future industries," the report noted.

Peter Tinley said decarbonisation was driving economic challenges and opportunities of the future. (ABC News: Eliza Laschon)

Businesses have already been taking that onboard, with news this week of BHP signing a deal to buy power from a $200 million wind farm south-east of Perth and mining billionaire Andrew Forrest purchasing another three cattle stations in the state's north-west to generate renewable energy.

Last year, the government released a strategy to guide its transition to a low-carbon future, which it is currently working through.

The report also laid bare just how significant a contributor to the state's finances the resources sector is, finding a 25 per cent drop in royalties would require "doubling the taxation effort across the rest of the economy to make up the shortfall."

There is widespread consensus about the need for WA to diversify its mining-reliant economy. (Supplied: Rio Tinto/Christian Sprogoe Photography)

Other recommendations included increasing investment in digital and technological trends, and competing for more foreign investment.

Dr Salazar particularly agreed with the report's suggestions about finding new trading partners.

"We are extremely reliant, for instance, in our trade exports to countries like China," she said.

"So if China decides, for instance, to close the borders to WA, especially iron ore that will be a disaster, not only for the state but Australia overall."

Energy, space and health key investment areas

As part of the state's Diversity WA strategy, State Development Minister Roger Cook last month launched a $100 million fund, designed to promote investment in WA.

Target areas included energy, space, health, international education, tourism, events and mining equipment and technology.

Mr Cook also promoted the fund as a way to show WA was open for business after two years of border closures.

Roger Cook launched the $100 million investment fund. (ABC News: Roger Cook)

"We know that economic diversification is hard and it will be a long road to ensure our economy can be integrated into those strategic sectors," he told parliament at the time.

"However, this initiative is another positive step in the journey towards the state's expansion into industries other than raw mineral extraction."

Mr Cook has consistently maintained Diversify WA, which aims to create an extra 150,000 jobs my mid-2024, shows the government's commitment to encourage new industries, despite the setbacks created by COVID.

Only time will tell if the government's current efforts in the field are enough, or if WA will continue to rise and fall with the mining sector.

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