Business investment looks to have been the hardest hit part of the Australian economy in 2020. The effects will linger over 2021 and 2022 – but the outlook has also improved.
Releasing the latest edition of Deloitte Access Economics’ quarterly Investment Monitor, Deloitte Access Economics partner and report lead author, Stephen Smith, said: “Local COVID-19 numbers remain small compared to other countries, the vaccine rollout is expected to start shortly, business confidence has improved, and the Reserve Bank has promised to keep interest rates at low levels for at least the next three years.
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“The turnaround in business confidence, which is at its highest level in two-and-a-half years, has been particularly remarkable. Clearly business increasingly thinks that COVID-19 is a bullet that Australia has largely dodged.
“And governments are also contributing, with almost $50 billion in additional infrastructure funding announced in recent state and territory budgets. The focus remains on projects that can be delivered in the near-term, with the value of contracts awarded lifting sharply in the final quarter of 2020. That suggests that 2021 will see an elevated level of infrastructure construction activity.
“Investment in infrastructure will play a key role in the efforts of governments to stimulate the economy and create jobs. The latest round of government budgets has seen almost “one quarter of a trillion dollars directed towards infrastructure from 2020-21 to 2023-24.”
Chart 1: General government infrastructure funding by state or territory
“But stimulus is only effective if it is actually spent, “which is why investment in infrastructure ranks highly on the economists’ list of preferred policy options,” Smith said.
“The costs of infrastructure have fallen, with interest rates at record lows, while the benefits have risen, with higher spending to help partly offset the impact from winding back JobKeeper and JobSeeker. That means the cut-off for projects considered ‘worthwhile doing’ has fallen notably.”
The current pipeline of public infrastructure investment remains dominated by a series of large projects. Transport projects with an estimated cost of $1 billion or more account for approximately 60% of total infrastructure project investment, with most of this concentrated in New South Wales and Victoria.
Chart 2: Major government infrastructure investment projects1
“There are some looming challenges though,” Smith said. “The public sector funds major projects, but it is usually the private sector that actually delivers them. And following a string of highly publicised losses among contractors, the list of builders willing to bid on major projects has been shrinking.
“There are also concerns around shortages of everything from building materials to skilled builders. This all raises the risk of cost blowouts and delays. Careful planning, a less adversarial relationship between governments and contractors, and a focus on smaller projects will all help. But the risk remains.
“These factors will help to limit the negatives that are weighing on investment, but will not undo them. So, although conditions have improved, business investment will still be a notable point of weakness for the economy in the near term.”
Deloitte Access Economics forecasts private business investment to grow at a slower rate than the wider Australian economy in 2021 before accelerating in 2022 and 2023. Public investment is set to grow by more than one quarter in 2021 before moderating thereafter.
Key Investment Monitor figures for the December quarter include:
- The value of projects in the database rose by $11.6 billion to $759.7 billion – a 1.5% increase from the previous quarter, driven by investment in the transport and mining industries
- The value of definite projects (those under construction or committed) increased by $26.7 billion over the quarter. A total of $272.2 billion worth of definite projects are currently included – more than one half of which are in the transport industry
- The value of planned projects (those under consideration or possible) decreased by $15.2 billion over the quarter. This was driven by projects progressing through planning stages and several projects being removed from the database.
We’ve said it before and will say it again. It’s the rate of change that matters to growth not the absolute level. The more capex spending you add the harder it is to sustain that growth as old projects roll-off.
State governments have bought themselves one year with $50bn, which is fine, but what comes after?