Infrastructure ain’t going to save shit

Via an obtuse Deloitte:

Deloitte Access Economics Investment Monitor: infrastructure to the rescue

8 August 2019:  The slowdown in the global economy is flowing through to Australian investment conditions.

Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte Access Economics partner and report lead author, Stephen Smith, said: “Measures of global business confidence have fallen to their lowest levels in almost five years amid trade tensions and political uncertainty, prompting many businesses to delay their capital expenditure plans.

“But there are a number of reasons why the outlook for investment in Australia is better than it is elsewhere. State and federal governments are continuing to deliver record amounts of infrastructure investment, the large mining-related falls in activity are now in the past, while some miners are investing in new or expanded mines to reach production targets. And despite the slowdown in economic growth, business profits continue to increase.

“But to be clear, the long-awaited recovery in business investment is encountering some rising challenges For example, capacity utilisation, a key leading indicator of investment, has faded alongside the pace of Australian growth over the last year or so.

“Deloitte Access Economics is forecasting private business investment to remain relatively flat in 2019, before recovering to grow at a faster rate than overall real GDP in 2020 and 2021.”

The shift in project activity from the nation’s north and west towards the south and east is continuing. New South Wales, Victoria and Queensland now account for more than three fifths of all definite project investment (those projects under construction or committed), up from a low of less than two fifths in late 2016.

The three states also account for three fifths of all planned project activity, the highest share seen since Investment Monitor began keeping records in March 2001. This is partly due to the large amount being invested in infrastructure in Australia’s eastern states, as well as the end of construction at a number of major mining projects in other states.

“Recent months have also seen a renewed focus on infrastructure investment as a means of stimulating the Australian economy,” Smith said.

“The federal government is investigating whether construction at small-to-medium sized projects can be brought forward, while the Governor of the Reserve Bank of Australia has called on both federal and state governments to increase investment.

“But there are a number of challenges to overcome when adding to the existing pipeline of infrastructure developments or fast-tracking particular projects.

“Government finances are constrained, while the record amount of infrastructure activity currently underway has led to anecdotal reports of shortages in skilled labour and materials. These potential shortages can lead to cost overruns and delays in delivering projects.”

The record pipeline of infrastructure projects is led by a number of large road and rail developments, with major project activity expected to reach a peak of around $22 billion in 2022.

Major road and rail projects

Key figures for the June quarter include:

  • The value of projects in the database rose by $24.4 billion to $713.8 billion – a 3.5% increase from the previous quarter
  • The value of definite projects (those under construction or committed) increased by $8.6 billion over the quarter. This has largely been due to upwards cost revisions as well as a number of projects progressing through the planning stages – particularly in the mining, transport and utilities sectors.
  • The value of planned projects (those under consideration or possible) increased by $15.8 billion over the quarter. Planned work is now at its highest level since late 2014.

Ah yes, the old investment stock chart to save the day. Problem is it is irrelevant. Investment flow is all that matters to growth and it is falling and will keep doing so. Why? The NBN and other project roll off:

That’s right, total infrastructure investment is going to fall for the next two years. That’s why, despite the hoopla around infrastructure today, new orders are falling, from the AIG construction PMI:

The truth is, once you lift public capex to a very high level, it is difficult to keep it there as projects roll off over time. Unless you are China and can simply order projects to nowhere from your imperial divan.

Infrastructure is not going to save the Australian economy.

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