BIS Shrapnel has released its half-yearly update to clients today, which states that the outlook for engineering construction (read mining investment) is weaker than earlier thought, and that engineering construction would decline by almost 20% over the four years to 2016-17. It also warns that there are downside risks to its forecasts in the event that a higher than expected Australian dollar causes the cancellation of more mining projects. From The Australian:
BIS Shrapnel will forecast that engineering construction work will decline 7.6 per cent in 2013-14, compared with the 5.4 per cent decline it was predicting in March. It will cite weaker outlook for resource projects, particularly coal and other minerals, and for publicly funded projects as state governments struggle with weak revenues and high debt levels.
“The risk is that if the Australian dollar remains higher for longer, then we could see more mining projects, particularly, drop out of the forecasts, and the fall in engineering construction work will be steeper,” senior manager Adrian Hart said.
Business leaders say the weaker dollar in recent months has provided Australia with a natural hedge against its high-cost, low-productivity environment. This is now being lost as the dollar rises, climbing from below US90c last month to US96.3c last night on the back of weakness in the US dollar…
The BIS Shrapnel half-yearly update, released to clients today, says the outlook for engineering construction activity is marginally weaker over the medium term than its March forecast and that activity peaked in 2012-13. Over the four years to 2016-17, the forecaster expects a decline in engineering construction of 19 per cent.
With large Queensland gas projects set for completion from 2016, BIS’ 19% forecast fall in engineering construction seems optimistic.
It is also worth pointing out that a 19% fall in engineering construction over the next four years would take it back to late-2011 levels – a level that remains highly elevated relative to historical experience (see red dot below).
At this level, there would remain significant scope for further falls before engineering construction could be considered to be running at levels consistent with long-run norms. At MB we see roughly double these falls as quite likely.
In any event, the above chart does demonstrate the unlikelihood of dwelling construction filling the void left as the mining investment boom unwinds. Currently, engineering construction is 2.5 times the size of dwelling construction, meaning that the BIS’ forecast 19% fall in engineering construction would require nearly a 50% uplift in dwelling construction in order for there to be no hit to growth (other things equal).
unconventionaleconomist@hotmail.com
