A Tsunami in Infrastructure Spending

There was a lot of chatter yesterday in Melbourne about the airport rail link project.

In case you missed it, Australian Prime Minister Malcolm Turnbull announced that the government is willing to pay for half of the project’s costs.

All the Victorian government needs to do is put up the other $5 billion for the much needed rail link.

The rail link would join Melbourne’s Tullamarine airport with the CBD.

The project could become a reality in the next 10 years. But, we are not holding our breath for it, they have been talking about this since the 1960s.

The truth is that infrastructure spending is booming in Australia.

Everywhere you go you see construction, especially transport developments.

Australia’s Federal government is looking to spend over $75 billion in the next 10 years on transport infrastructure alone in Australia.

As you can see in the graph below, there is a tsunami of transport infrastructure investment coming our way. Much of it taking place in NSW and Victoria.

Transport Infrastructure Investment 13-04-2018

Source: Business Insider The Smart Infrastructure
[Click to enlarge]

Sydney is investing heavily in transport projects like tollways, rail lines and the Western Sydney Airport. Melbourne also has on-going toll road, tunnel and metro rail projects.

There are also several mega projects in the works.

The Federal government has committed $9.3 billion for the Inland Rail Project. This rail freight route will join Melbourne to Brisbane through regional areas.

It should decrease travel times and make it cheaper to move goods around the country.

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Sydney also has some big plans.

You see, like Melbourne, the city expects its population to almost double, from 4.7 million to 8 million, by 2056.

The way they are looking to deal with this is by organising it into a metropolis of three cities: Sydney CBD, Parramatta and Badgery Creek.

Sydney CBD will continue to be the financial hub. Parramatta will be the centre for health and education. Badgerys Creek will be the centre for logistics and manufacturing.

You can see a diagram of how it could look like here:

Sydney CBD, Parramatta and Badgery Creek 13-04-2018


Source: The Draft Greater Sydney Region Plan 2017
[Click to enlarge]

The new strategy aims to make Sydney a 30-minute city. That is, where 70% of the population will be able to access jobs and services in 30 minutes.

The increase in population means that the area will need to create 817,000 extra jobs, and 725,000 more homes, by then. 

Australia’s population is growing

According to the Australian Bureau of Statistics (ABS), Australia’s population could double to 46 million by 2075.

As reported by Macquarie, the UN forecasts Australia’s urbanisation rate will increase to 93% by 2050. This is a much higher rate than other developed nations.

That’s why the government is looking to spend around $323 billion over the next four years on planning and building major infrastructure projects.

The infrastructure boom should boost GDP and create jobs. Especially as housing construction and household spending slows.

There are currently 1.2 million people employed in construction, around 9% of Australia’s total labour force. A slowdown in construction could really affect the unemployment rate.

Consumer spending has also been slowing due to already high debt and slow wage growth. Household spending makes up about 50% of the economy.

With low business investment growth, the government has been picking up the slack in recent years.

Interest rates are low, debt is cheap and Australian government debt is small…compared to other developed nations. So, it is a good time to start spending on infrastructure…

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According to the Australian Department of Jobs and Small Business, employment from construction could grow by almost 11% in the next four years. With residential construction slowing, much of this growth will be coming from infrastructure spending.

As the below graph from AMP Capital shows, the construction and transport sectors have already seen some major gains.

Industry Job Gains or Losses 13-04-2018


Source: AMP Capital
[Click to enlarge]

The boost in infrastructure spending could be supporting Australia’s economy for the next few years as other sectors in the economy slow.

Yet, according to AMP capital, the boost from infrastructure won’t last long:

The current pipeline of infrastructure projects will slow significantly in mid-2019, which will be a hit to growth and employment. This means that other parts of the economy will need to be stronger to offset a slowing contribution from the government sector.

What could happen once infrastructure spending runs out of steam?

With high debt and the looming prospect of higher interest rates, it is unlikely consumer spending will be picking up the tab.

Unless another sector does, we could see a major slowdown in the economy.

Best,

Selva Freigedo,
Editor, Markets & Money


Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.


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