Deloitte Access Economics Investment Monitor: the outlook improves, but risks are rising has been saved
Deloitte Access Economics Investment Monitor: the outlook improves, but risks are rising
Project investment set to soar after Omicron
10 May 2022: The outlook for business investment is central to what happens to the Australian economy – and as the emergency supports that kept the economy going during COVID have been wound back, growth has increasingly needed to be driven by businesses and households.
Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte Access Economics partner and report lead author, Stephen Smith, said: “The good news is that the outlook for business investment is solid. The key positive is that the economy has recovered faster than previously expected. This has boosted business profits and reduced spare capacity. That’s a combination that typically leads to an increase in business investment.
“Many businesses also now see the worst of the pandemic as being behind them. Most notably, large-scale and long-lasting lockdowns are seen as unlikely.
”Heavily disrupted supply chains have meant that some businesses weren’t able to invest when they wanted to. But as supplies – eventually – become more plentiful, that will unleash a degree of catch-up spending by businesses. Much of this will flow into machinery and equipment investment, but there is also expected to be a boost to non-residential and engineering construction.
“There are also some industry-specific factors supporting investment. Airlines are purchasing new planes, miners are looking to increase production while commodity prices are elevated, and the record amount of public sector infrastructure investment is generating positives for private sector projects.
“Yet there are some risks to the outlook. Higher borrowing costs for businesses – particularly those already in debt – are likely to weigh on investment, the growth in public infrastructure investment has peaked, commodity prices are forecast to fall in 2022, pandemic-driven tax breaks are set to end in 2023, and there’s elevated uncertainty around the global geopolitical environment.”
Despite that long list of concerns, Deloitte Access Economics forecasts growth in business investment to outpace growth in the wider economy from 2022 – accounting for almost one third of the growth in GDP over the next five years. Public investment is forecast to grow in 2022, before falling in 2023 as the amount of infrastructure investment work in the pipeline reaches a peak.
“Russia’s invasion of Ukraine has led to windfall gains for Australian producers of iron ore, coal, gas and base metals,” Smith said. “This is encouraging investment in replacement capacity, but there is uncertainty around how long prices will remain elevated and there are added risks for Australia’s more carbon-intensive mining industries.
“That suggests that today’s record prices may not be followed by a matching increase in investment. Mining exploration expenditure – a key leading indicator of investment – has returned to the levels seen during the gas construction boom in the early 2010s. But recent years have seen much smaller amounts invested in new mining projects for a given amount of exploration expenditure.
“Business investment in minerals and energy may be more likely to follow the small gain seen in 2008, when China responded to the global financial crisis by stimulating its construction industry, rather than 2011 to 2013, during Australia’s gas construction boom.
“The war in Ukraine has also prompted a broader rethink of energy security, particularly in Europe. One pathway to bolstering this security is through renewables. This strengthens the business case for new investment in Australia’s critical minerals and metals industry.”
Chart 1: Value of mining projects under construction and mining exploration expenditure
Key Investment Monitor figures for the March quarter include:
- The value of projects in the database rose by $15.3 billion to $861.7 billion – a 1.8% increase from the previous quarter
- The value of definite projects (those under construction or committed) increased by $3.7 billion over the quarter, largely due to several transport and renewable energy projects progressing through the planning stages, outweighing the effect of project completions. A total of $407.0 billion worth of definite projects are currently included in the database, the highest total seen since the end of the gas construction boom in late 2016
- The value of planned projects (those under consideration or possible) increased by $11.6 billion over the quarter to $454.7 billion. This reflects new spending in the 2022-23 Federal Budget and new private sector projects – particularly in the energy, entertainment and recreation, and offices industries.
Deloitte Access Economics’ Investment Monitor is primarily a source of information for businesses and others about major engineering and commercial construction projects and their promoters. It is also a barometer of structural change in the Australian economy, and of the investment climate – now and in the future.
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