Is more infrastructure the answer?
Investment Monitor Q3 2019
30 October 2019: Subdued business investment is an increasingly important driver of the global economic slowdown. Although trade wars continue to dominate the headlines – and global trade volumes remain weak – the bigger impact is coming from business caution.
Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte Access Economics partner and report lead author, Stephen Smith, said: “Business leaders appear concerned by the stop-start nature of policymaking seen in many countries, as well as the unpredictability of key international flashpoints.
“But heightened uncertainty appears to be doing less damage to business investment prospects in Australia compared to other developed economies.”
That's partly because:
- Australian miners are investing more in order to replace ageing deposits
- State and territory governments are continuing to invest in infrastructure
- Australia's population growth rate remains relatively high
- The cost of credit continues to fall.
“To be clear, there are some challenges,” Smith said. “Capacity utilisation – a key leading indicator of investment – has faded alongside the pace of Australian growth since mid-2018. And although the Reserve Bank has cut rates, if businesses lack confidence they’re not likely to invest in new projects – something the Reserve Bank can’t really change by cutting rates further.
“Deloitte Access Economics is forecasting private business investment to remain subdued in 2019-20, before recovering to grow at a faster rate than overall real GDP.”
Smith said public investment had also been thrust into the political spotlight, with the Reserve Bank calling on the federal government to increase its infrastructure investment program as a way to stimulate wages and prices.
“That request has merit, particularly when the cost of borrowing is at a record low,” he said. “But there are a number of other factors to consider.
“The elevated level of current activity is already generating shortages in the skilled labour and specialised equipment needed to deliver major infrastructure projects, particularly so in Sydney and Melbourne.
“Infrastructure is also mostly a state responsibility, and many states are experiencing revenue write-downs.
“And the federal government is reluctant to spend large amounts as Canberra aims for a budget surplus – partly for political reasons, but partly because this gives them more room to move in the event of a crisis.
“That said, there are some areas where governments can do more. The current pipeline remains dominated by a series of large road and rail projects, mostly in Sydney and Melbourne, but there is still some capacity to deliver smaller scale projects outside the major capital cities.
“These are easier for contractors to coordinate and don’t tend to require the same amount of specialised skills and equipment to deliver. This helps to minimise labour and materials shortages and reduces the risk of delays and cost-overruns.”
More than 90% of the decline in project activity in Australia’s north and west has been due to the mining sector alone, while transport investment accounts for more than 80% of the gain in activity in the east and south. But these trends may be set to wane in coming years.
“Activity in the east and south will continue to be supported by public infrastructure investment, but governments have already committed record amounts towards infrastructure and there appears to be limited scope for further increases,” Smith said.
“At the same time, activity in the north and west will be supported by new spending from miners – particularly in Western Australia’s iron ore sector and Queensland’s coal sector.”
Key figures for the September quarter include:
- The value of projects in the database rose by $38.6 billion to $752.4 billion – a 5.4% increase from the previous quarter
- The value of definite projects (those under construction or committed) increased by $8.4 billion over the quarter. This has largely been due to a number of projects progressing through the planning stages in the mining and infrastructure sectors, as well as a number of upwards cost revisions.
- The value of planned projects (those under consideration or possible) increased by $30.2 billion over the quarter. Planned work is now at its highest level since mid-2013.
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.