AMP has sounded a warning bell on Australia's infrastructure boom

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The recent boost in infrastructure spending will support Australia’s economy in 2018, AMP says.

But senior economist Diana Mousina said investment is forecast to taper off by the middle of next year. And so future economic growth — and the outlook for interest rates — will be dependent on other areas of the economy picking up the slack.

“A substantial pipeline of infrastructure projects will keep Australian growth buoyant over 2018 (we expect growth of 2.7% in 2018 from 2.3% in 2017) and into early 2019,” Mousina said.

“But, government spending will taper off in mid-2019 once projects finish construction which will drag on growth and employment.”

Mousina based her outlook on the budgeted figures of federal and state governments, with extra funding added to big infrastructure projects.

“States (particularly in New South Wales and Victoria) have been collecting significant stamp duty payments from a booming property market,” Moussina said.

“In the 2017 budget, the federal government also committed to spending directly through equity financing to build the Melbourne to Brisbane Inland Rail and Western Sydney Airport.”

The employment-heavy nature of infrastructure projects means the economy is well-placed to transition in the event of a continued decline in residential construction, which has been on a broader downward trend in recent months.

Mousina included the chart below as evidence of the contribution from infrastructure jobs to the recent strength in Australia’s labour market, highlighting the continued strength in the construction sector:

However, “government spending will taper off in mid-2019 once projects finish construction which will drag on growth and employment,” Mousina said.

At that point, further investment from the private sector will be required to pick up the slack.

And there’s been some evidence that conditions are conducive for increased levels of capital expenditure.

Analysts are forecasting a rise in profits as ASX200 earnings season gets underway, domestic business conditions are holding near all-time highs and Australia’s biggest companies have hinted they may be getting ready to spend.

But for now, it’s clear that high levels of spending from both federal and state governments is playing a key role in maintaining Australia’s rate of economic growth.

In view of that, “the RBA will need to tread carefully in hiking interest rates in 2019, ensuring that the interest rate-sensitive parts of the economy do not come under significant pressure, especially if the Australian dollar is still elevated,” Mousina said.

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