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Business investment will decline noticeably over the next few years as the mining capex downturn accelerates.
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The largest impact will be in the engineering construction space. Non‑mining engineering construction growth remains tepid. Engineering construction will be a drag on GDP growth over the next three years.
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Non‑residential building construction is forecast to rise gradually over 2014 and into 2015.
Business outlook
One of the key tasks for policymakers in 2014 is facilitating the transition from mining to non‑mining led growth. The peak in resource investment has passed its decline will be a significant drag on economic growth over the next few years. The downturn in mining activity will need to be offset by a pick‑up in non‑mining growth. The recent focus has been on the housing sector and lifting residential construction. Residential construction looks like it will make a significant contribution to growth over 2014 and extend into 2015, providing a large offset to lower levels of mining construction.
One of the other major sectors that is expected to play a role in the growth transition is non‑mining business investment. We expect to see a gradual rise in overall spending on construction outside of the resources sector. The background indicators and fundamentals that would normally produce a pick up in non‑mining capex are firmly in place. Additionally, the demographic trends mean higher demand for health and education facilities. State Governments and the private sector are the main providers in those areas.
Private business investment is made up of non‑building construction, engineering construction, machinery and equipment investment and other business investment. We expect private business investment to decline over the next 3 years, falling by 4.2% in 2013/14, 4.0% in 2014/15 and 4.9% in 2015/16.
Engineering construction has been the key benefactor of the surge in mining investment. This means that it will also be the area where the largest contraction in activity will occur over the near‑term. Because of the large amount of mining‑related work that exists in the pipeline, engineering construction activity will decrease over the next few years, but it will not collapse. The engineering construction pipeline is dominated by large multi‑year LNG projects. Oil and gas projects make up 81% of total projects currently committed. The majority of these mega‑LNG projects (Gorgon, Gladstone LNG and Australia Pacific LNG) will finish construction in 2015. The completion of these projects will see engineering construction slow significantly over 2015‑2016. Iron ore and coal projects are already unwinding which will put downward pressure on engineering construction over 2014. We expect a 15.7% fall in engineering construction in 2014/15 and a 20.5% decrease in 2015/16.
Engineering construction activity in the non‑mining sector is currently at low levels. The pipeline of non‑mining engineering construction is focussed in transport‑related activity. The new Federal government has also indicated their focus on infrastructure spending. According to the Deloitte Access Economics Investment Monitor, there will be an additional $4.7bn of public money allocated to infrastructure projects over the next four years, with the majority in road and tunnel projects. Greater acceptance by users of road tolls is a positive for further investment in relatively expensive tunnels to solve congestion issues.
Machinery and equipment investment has also benefitted from the surge in mining investment, but by a lesser extent than in the engineering space. The mega‑LNG projects under construction are very equipment intensive. The slowdown in mining construction will be dampen machinery and equipment investment in the near‑term. But, this impact is only expected to be temporary because equipment investment is more connected to non‑resource investment than to resource‑related investment.
Commercial construction activity is forecast to remain quite firm over 2014. There are large projects approved for construction in Sydney and Melbourne. Commercial office vacancy rates are expected to maintain an upward bias as new projects are delivered. Strong demand for apartments could accelerate the conversion of older inner‑city offices and warehouses. Higher quality and larger distribution centres should keep industrial construction firm along transport routes.
The RBA’s trend growth forecasts for 2015 onwards are based on the expectation that non‑mining business investment growth will pick up modestly as the downturn in mining capex accelerates. Trends in engineering construction and non‑residential building construction will be very important in assessing the progress on the non‑mining frontier.
By Diana Mousina
