The decline in Australian engineering construction will accelerate to a sharp collapse over the next few years, cutting employment and hitting the broader economy, according to the latest forecasts from analysts at BIS Shrapnel.
Activity is expected to fall 40% from its 2012-13 peak of $130.3 billion to $79.6 billion by 2017-18, due to end of the mining investment boom and a lack of new state and federal government infrastructure projects.
BIS Shrapnel says total work will fall by a steeper than expected 13% in 2014-15 and another 15% in 2015-16, with further substantial declines in the subsequent two years.
The fall in engineering construction, coupled with reduced investment in oil and gas because of declining commodity prices, will more than offset rising residential building activity, keeping Australian economic growth below 3%.
Mining and heavy industry is the key segment feeling the heat from the resources investment downturn, with activity projected to fall 60% over the four years to 2017-18 from a peak of $60.6 billion in 2013-14.
However, the engineering construction market is also being dragged down by sharp falls in publicly funded infrastructure works.
Since 2011-12, publicly funded engineering construction has fallen 15% in real terms. BIS Shrapnel expects publicly funded work to fall another 13% through 2014-15 alone before stabilising in 2015-16.
“Public investment has been falling for several years now as local, state and the federal government tackle the problems of weaker growth in revenues, higher budget deficits and higher levels of debt,” says Adrian Hart, Senior Manager of BIS Shrapnel’s Infrastructure and Mining Unit.
“Major infrastructure projects have been completed without being replaced by new work – resulting in a de facto tightening in infrastructure investment.”
According to Hart, the contraction in resources investment presents a policy dilemma for the federal and state governments, which provide the bulk of infrastructure funding.
“Although publicly funded infrastructure works still remain high compared to the experience of the 1980s and 1990s, the reality is that those decades represented a period of significant underinvestment in infrastructure which the 2000s boom went some way to rectify,” says Hart.
“But there is still a long way to go. Considering the severity of the downturn in resources-related work, it makes sense for governments to help smooth out the cycle and offer a sustainable and secure pipeline of infrastructure projects.”
The good news is that the current economic environment is actually highly supportive towards public infrastructure investment, says Hart.
These factors include historically low costs of capital, lower rates of construction cost escalation and tighter construction margins and a strong market appetite for existing infrastructure assets.
Overall, the biggest winners in the engineering construction market through the next five years will be those who tap into the coming cycle of non-resources infrastructure activity, with roads, railways, telecommunications and water offering the strongest growth.
While resources-related engineering construction will continue to fall through to 2017-18, BIS Shrapnel predicts that non-resources infrastructure work will start rising again from 2015-16, with particularly strong growth apparent towards the end of the decade.
However, Hart says the infrastructure upswing will only be gradual and will not go anywhere near offsetting the impact of falling resources investment.