Investment Monitor June 2013 – A last hurrah


The last few months could be seen as somewhat of a turning point for the Australian economy.  

The Reserve Bank cut official interest rates to the lowest level on record, citing below trend growth and moderate inflation.  The $A fell sharply, trading at around US 90 cents in mid-July, down from more than US$1.05 in mid-April.  And the value of resources projects in the Investment Monitor database fell for a second consecutive quarter – the first such occurrence in a decade.

The June 2013 issue of Investment Monitor saw the total value of projects in the database fall.  The value of projects decreased by $51.8 billion to $877.1 billion – a 5.6% fall from the March quarter of 2013 to be 4.7% lower than a year ago.  

The value of definite projects in the database (under construction or committed) continued to grow over the June quarter of 2013, rising in value by 3.7% to $468.1 billion.  This is the highest value ever recorded, and represents a gain of 5.2% over the June quarter of 2012.

Conversely the value of planned projects in the database (those under consideration or possible) fell by $68.3 billion (or 14.3%) compared to last quarter.

The profile of work in the Investment Monitor database suggests a peak in activity through 2013-14 is likely.  Beyond that, the sheer volume of work in the pipeline means that a plateau may be in store.

The star turn of the past decade has been engineering construction.  Representing just 1.2% of the economy 12 years ago, it roared ahead of the global financial crisis, and then roared again, accounting for 6.6% of the economy in 2012.  The current level of spending is dominated by just seven huge LNG projects, and the further they progress the closer the peak in engineering construction activity becomes.  

Non-residential building has long played second fiddle to engineering construction, and although there have been times when the likes of office and retail construction have blossomed, the present outlook remains shaky.  With non-residential building approvals well below their pre-GFC levels, and with governments looking to constrain spending, this category of construction activity is looking increasingly unlikely to take over the mantle of growth driver for the Australian economy.  

Even with a relatively gradual decline in investment, there will be wider implications for growth.  Deloitte Access Economics estimates that over the three years to 2012-13, engineering investment spending contributed some 40% of Australian economic growth.  From 2013-14 onward that same category of spending is expected to subtract from growth.  

There will be some natural offsets – lower resources investment means lower imports of capital equipment, for example.  However other areas of the economy such as household spending will need to tick up.  

That suggests some key challenges for the Australian economy over the medium term.

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