Australia’s economy is in the doldrums and infrastructure is failing to prop it up
Greg Jericho
The level of engineering work done in the March quarter of this year was 13% below what it was a year ago.
The latest engineering construction figures show yet more evidence that Australia’s economy has been struggling for nearly a year now, and that the public sector is failing to fill the gap of falling private sector infrastructure work.
What a difference a year makes. This time last year I wrote of the latest engineering construction figures that “infrastructure spending remains well below peak levels” but “fortunately the level of public infrastructure spending has been rising very strongly”.
Bond yields are useful for telling us about the future. And it’s not looking good.
By the end of the year I was noting that the level of public infrastructure work was slowing and private engineering construction also looked to be going backwards again.
And now, with the latest release of the engineering construction figures by the Australian Bureau of Statistics, we see the volume of infrastructure work done for both the private and public sectors has declined for four straight quarters and is now at its lowest level since 2016:
The level of engineering work done in the March quarter of this year was 13% below what it was a year ago – the worst growth since the December 2016 quarter, and is due almost equally to falls in work done in both the private and public sectors:
Whereas a year ago public sector infrastructure work was growing at an annual rate of 19% (the strongest since the GFC) now it is falling at a rate of 15%, the biggest fall for five years.
The falls occur across the country, but it is very much led by the mining sector. While engineering construction in Western Australia, Queensland and the Northern Territory makes up around 48% of all engineering work done in Australia, it accounted for 84% of the fall in work done over the past year:
But we should not merely relax and think this is again just a problem of the end of the mining boom, because all states on the mainland recorded a lower volume of engineering work done in March this year than 12 months ago. Only Tasmania has seen any growth:
It is a situation that truly speaks to the calls from the head of the Reserve Bank, Philip Lowe, for increased infrastructure spending.
While there is rightly some questions asked – such as those by economist Stephen Koukoulas on what precise form that infrastructure should take, it is clear over the past six months there has been a large drop-off in public-sector works.
As a percentage of GDP, the engineering work done on roads and bridges over the past six months is as low as it has been for four years and is sharply down on where it was a year ago:
While the rolling out of the NBN continues to keep telecommunications engineering work at high levels, it has not been anywhere near enough to make up for the fall in the work done on roads and bridges.
When we consider that public investment contributed around a fifth of the growth in the economy over the past year, any drop in public infrastructure work at a time when private sector infrastructure work is also falling does not bode well for growth over the coming year.
Currently there appears to be little increase in the amount of work yet to be done for the public sector.
In fact the latest figures suggest the lowest level of public sector work still yet to be done for three years:
Yes there remains a sizeable pipeline of work in the years ahead, but little sense that we are going to see much of an increase on the level of work that is currently being undertaken.
Now clearly the level of public-sector work cannot always grow faster, but should private-sector spending continue to fall then declines in the public sector will only compound the problem.
Fortunately there is some good news ahead for the private sector. The value of work yet to be done is rising – mostly due to mining operations. This generally does feed into actual work, but at this stage looks to be still much lower than in the past:
And without infrastructure spending powering any domestic economic growth, we fall back on consumer spending, which has been suffering due to flat real income and wages growth.
The figures continue to provide yet more evidence that the economy was suffering well before the election was called and it is why the market is pricing in a nearly 90% chance of a interest rate cut to 1% next week and fully pricing in a cut to 0.75% by November.
