Craig James tramples AFR on infrastructure unicorn

Over the weekend, the AFR  headlined with a candidate for the worst economic article of the year:

Australia is on the cusp of the biggest wave of public infrastructure spending in at least three decades and has already ensured a record proportion of construction workers have found jobs.

In a shift that has been overlooked amid the focus on negatives such as high household debt, weak consumer sentiment and low wages growth, research published this week shows almost $100 billion in local, state and federal government spending will hit the economy this year financial alone.

According to a chart presented by Reserve Bank of Australia governor Philip Lowe in a speech in Perth this week, public infrastructure work “yet to be done” will be just under 6 per cent of nominal gross domestic product in 2017.

That figure is set to keep rising, with transport projects alone set to boom for much of the next five years, and peak three years from now in 2020, according to research by economic consultancy Macromonitor.

Craig James from Commsec says that while bad news about the economy draws people’s attention, new infrastructure spending is likely to be comparable or larger than what was invested during the resources boom of the past 15 years.

“It’s a huge amount, one and half times the size of the mining boom, and people tend to lose sight of it because it’s scattered around Australia,” he said.

Goodness me that is poor reporting. And Craig James. Really?

There is not $100bn of money hitting the economy this year alone. That confuses stock with flow. There is an aggregate $100bn of projects kicking off this year but the flow of spending is spread over many years. According to the chart, this year spending is only rising from about $7bn to $11bn. That’ll add 0.25% to GDP this year if you believe it. Personally I think we’re seeing a steeper ramp of projects so the impact will be larger this year. Perhaps double. Then smaller next year.

Moreover, the chart does not include the NBN when it should. Here’s one that does, from ANZ:

Note that NBN spending begins to wind down next year so the growth in new projects also has to overcome this falling year over year spending.

Even if you accept the AFR chart, it means that next year we’ll see roughly the same amount of new spending hit the economy as we did this year, around $4bn, with much the same GDP impact at 0.25%. 2019 will see bugger all given the growth in spending is from a higher base and the lift will be tiny.

That’s the thing. Capital investment of this nature only adds to growth when it is higher year over year. It is rate of change that matters not the aggregate. You could build all of Australia every year but if it’s not more than last year it will not add to growth.

The Botox Boom, as I call it, therefore has about a year to run.

Claiming that this pipeline is bigger than the mining boom is preposterous. Only if you limit your scope to a few tiny mining rail projects. With a more appropriate lens, giant infrastructure such as the Gorgon project was alone worth $74bn, three-quarters of today’s total infrastructure push. There were six other massive LNG projects, huge Pilbara developments, vast coal investments, ports, rail, towns, you name it. Many hundreds of billions in total. Here’s only the buildings and structures component versus the Botox boom:

Moreover, the above chart materially underestimates the mining spend because it does not include a lot of sundry engineering work and equipment. At it’s peak mining was investing a new $100bn per annum in flow. Even during the bust today it is investing $40bn this year, it’s just a lot smaller than last year so it is withdrawing from growth. But it is still 250% larger than the peak of the celebrated infrastructure boom in 2019.

Without putting too fine a point on it, the mining boom was six or seven times larger than the Botox Boom and the AFR analysis is hogwash.