Engineering construction to fall despite Govt boost – Part One

BIS Shrapnel’s Engineering Construction in Australia, 2008/09–2022/23 report found that while Federally-funded work is set to increase strongly, it will be more than offset by falling activity from other levels of Government and a much larger fall in privately-funded work. In total, BIS Shrapnel is forecasting a decline in engineering construction activity of 20 per cent, which is almost $14 billion in inflation-adjusted prices, in the two years to 2010/11. This decline will come mostly from privately-funded work.
However, BIS Shrapnel economist, Damon Roast, said it is important to note that engineering construction has still powered on in 2008/09.
“The continued strong growth so far this year is largely due to the long lead times for many projects,” he explained. “In other words, much of the work now underway was proposed in far rosier economic times and our forecast is that growth over 2008/09 will be about 17 per cent.”
BIS Shrapnel expects the fall in engineering construction, which will be led by the mining industry, will start later this year and continue through 2010/11. Roast said privately funded engineering construction was the driver of the boom, and from the trough of 2000/01 to the peak of 2008/09, total activity will have almost tripled. The bulk of this expansion was from privately-funded work, with most of this from construction of new or expanded mines.
“The slump in demand for resources means the next round of mining projects are in doubt, with some still-feasible projects already being delayed due to companies’ financial problems,” said Roast. “However, the global downturn and credit issues will decrease private activity by 30 per cent by 2010/11, and this weakness will remain until credit issues are resolved.”
BIS Shrapnel notes the extent of the decline in engineering construction will be limited by Federal Government funding. This funding was initially aimed at infrastructure bottlenecks, but is now part of the stimulus package. And while this has been long needed, it will not be enough or happen soon enough to stop a major decline in total activity.
“While private work will jump four-fold from trough to peak, public activity will only jump two-thirds to be just 36 per cent of all activity in 2008/09,” said Roast. “Some States have huge investment programs, but they are in doubt. The States do not have major borrowing power and are not counter-cyclical investors. The end of some ‘once every 20 years’ projects will mean falls in activity and the downturn will make it worse.
“Throw in the financial problems of local councils and the size of the task for the Federal Government’s Building Australia Fund and Building Australia Program becomes evident,” said Roast. “Even if they receive all funds as pledged and fast-tracked projects are done as planned, we will still see small declines in public activity from 2010/11. Many projects are just not ‘shovel-ready’ and will not be for some time.”
BIS Shrapnel expects the recovery in engineering construction to gain traction from 2012 or 2013, contingent on a full resolution of credit problems and the emergence of the major economies from recession. A return to health of China would be of obvious benefit, but world recovery would be the catalyst for a number of major resources projects to proceed, such as the expansion of Olympic Dam in South Australia.
However, if recovery is delayed this will only create a need for more activity later. In past booms over-investment was a trigger for the bust, but this time the global financial crisis nipped much of this in the bud. A number of Governments, scarred by memories of bottlenecks, would like to start many long-needed projects, but will mostly not do so until their need becomes more urgent again.
“As a result, when recovery across the economy eventually does take place, there will not be the usual amount of excess capacity,” said Roast. “When one also considers that long-term under-investment remains in many sectors, as well as the need for investment due to population growth, aging assets and climate change, it becomes clear any extended weakness only increases the need for greater activity into the late 2010s.”

To read the rest of this report, click here.