The rapid increase in costs faced by Local Governments in recent times has now peaked, but growth rates are still above the long-term average. While the slowing rates of inflation across Australia will come as welcome news, the focus is now shifting to the emerging challenges resulting from the global economy and its implications for WA and the Local Government sector.  
 

  • The Local Government Cost Index rose by 0.6% in the June quarter, the lowest quarterly increase since inflation took off in March 2021. In annual terms the LGCI increased by 4.4% over the last year.
  • The global economy is forecast to slow in the coming years with implications for the WA economy
  • Whilst inflation has eased there still remains considerable risk to the domestic economy as private sector spending is closing
  • The growth in construction costs has eased at an aggregate level however some components continue to see supply pressures and price increases
  • Wages are increasing at the fastest rate since December 2012 as the labour market remains tight despite significant population growth
  • Insurance and risk financing costs have been increasing across most categories for households and for Local Governments

 
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Global Impacts on the WA Economy

  • The global economy is forecast to slow in coming years
  • Inflation is falling across the globe, but significant risks are present as wages grow and the ongoing threat of escalating conflict remains
  • The biggest threat to the trade-exposed WA economy is coming from China.
Many of the economic challenges faced by WA in recent years have stemmed from global issues: the COVID-19 pandemic, rising inflation and its impact on the cost of living, supply-chain issues, and economic shocks from the invasion of Ukraine. As an open economy, Australia is impacted by the global economy through trade policies, the value of the Australian dollar and the demand for our exports.


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WA Economic Outlook 

  • Conditions in the WA economy are expected to moderate in coming years in line with recent efforts to reduce inflation, capacity constraints in the resource sector, and global economic uncertainty particularly in China
  • Interest rate hikes are impacting the domestic economy as reflected in indicators of retail sales, housing activity, and business and consumer confidence
  • While private sector spending is slowing, Government investment is continuing to support the domestic economy in the short term as work continues on major infrastructure projects
  • There is mounting speculation that the Reserve Bank of Australia’s tightening cycle may have reached an end, with inflation starting to trend downwards
  • The WA economy is well placed to withstand a global economic slowdown, however in an uncertain economic climate, there remain significant risks to the forecast.

 
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Local Government Cost Index

  • The LGCI has continued to ease in recent months, recording its lowest quarterly increase since March 2021
  • The overall figures mask some components of the index that are trending upwards
  • Employee costs, insurance costs and machinery and equipment are all placing upward pressure on the index
  • Construction costs have continued to moderate following double-digit rates of growth in 2021-22
  • WALGA continues to encourage Local Governments to prepare for multiple scenarios through their budgeting process and to be adaptable to changing economic conditions.

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Construction Costs

  • Growth in construction costs has continued to ease in recent months, driven by falling fuel prices and easing global supply chain pressures
  • Non-residential building costs have slowed at a faster rate than road and bridge costs, which have remained above the long-term average due to continued strong increases in the cost of some materials
  • While the base case is for construction costs to continue to moderate and then settle at a higher level, risks to the forecast remain. A slowdown in the global economy may see prices ease, however, a strong pipeline of construction in WA is suggests that the competition for labour and materials will remain strong in the near term.

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Labour Market and Wages

  • Wage pressures in WA accelerated in the June quarter of 2023, growing at the fastest annual rate since December 2012
  • Official data is expected to show further increases in coming months, as pay increases at the end of the financial year and increases to minimum wages and award rates of pay come into effect
  • Although wages are increasing, these benefits are not yet being felt by households given that the rate of growth is slower than the national CPI. However, June quarter of 2023 marked a tipping point where wages growth kept pace with inflation in WA suggesting that real wages growth is not far away.

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Insurance and Risk Financing

  • Insurance costs have been increasing across most categories over the past year
  • While insurance costs are increasing, to date the mutual (LGIS) has insulated the sector against the coverage and pricing changes witnessed in the traditional insurance market
  • To discuss protection offered by the mutual and pricing, WA Local Governments can contact LGIS directly


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