The End of the Aussie Investment Boom

What does the future hold for Australia’s economy? Well, if we focus on the economy for a moment (a quaint notion) then the story for Australia in 2013 is what will replace the mining boom. Today’s Financial Review reports that one of Australia’s largest contractors, UGL, will cut more than 700 jobs in response to a downturn in engineering work. CEO Richard Leupen reckons the sector faces the biggest structural change in a decade.

It’s all in response to the peak in mining investment, which should start showing up in the figures this year. Recently, contractor Monadelphous announced a near 40% increase in first half earnings on what it repeatedly described as an ‘extraordinary surge in construction work’. It made the obvious point that it wouldn’t repeat such strong growth.

The end of the Aussie mining investment boom looks like closely matching the end of the Chinese credit boom. Check out these charts from the RBA’s chart pack. The first one shows business investment as a share of nominal GDP. It’s approaching 19%, the highest level in we don’t know how long, but certainly for a few decades.

 

As you can see, investment levels really picked up at the start of 2000. This was around the time that ultra-loose US monetary policy, transmitted to China through the US dollar peg arrangement, began stimulating the Chinese economy. It needed resources to grow. Australia had the resources, but not the infrastructure to develop them.

Hence the investment boom to develop and ship these resources out of the country.

As the next chart makes clear, the real driver of the investment boom was the engineering sector…the contractors to the mining sector and the constructors of the huge resource projects. Having gone from a less than 2% share of nominal GDP to 7% in just over a decade, you can see why UGL’s CEO reckons the sector faces massive structural change, if investment (and China) has peaked.

Australia has a dwindling number of projects to sustain the boom. The RBA reckons it will be over in 2014. So they’re trying to generate a housing boom to take up the slack…an absurd idea if we’ve ever heard one, but certainly straight out of the central bankers’ playbook. And with faith in this playbook so high, it’s one the market whole-heartedly agrees with.

So if capital expenditure figures due out today prove disappointing, expect pressure to mount on the RBA to cut rates again in March…because cutting interest rates and debt monetisation fixes everything. Just ask Japan.

Except low interest rates will have a hard time fixing anything if you throw a stumbling China into the mix. And it IS stumbling…

More on China’s (and Australia’s) problems tomorrow.

Regards,
Greg Canavan
for Markets and Money

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Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

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2 Comments on "The End of the Aussie Investment Boom"

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Marcus
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I am working for an Engineering Design consultancy in Perth, it all started happening September last year when our workload fell off a cliff, most Engineering consultants have been laying off design staff in there hundreds since! So I’m not surprised, but no mention of this in the mainstream press. For the consultant designers the Boom is well and truly over! Keep up the good work Greg

swinging voter
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engineering sector on major engineering projects is correlated to economic growth which means crrelation to politics…. which means corelaton to social development of Australia……. so a far as CEO’s contribution to the structural fabric of Australia’s engineering sector…..what major contribution has richard made to the engineering industry other than hanging on too long and forcing draconian style, humilating witnessed urine screens onto the industry? guilty until proven innocent was richard’s motto….so not submitting to UGL demands to flashing the genitals was apparently an admission of drug takin guilt…. with excessive levels of HR churn in companies such as UGL/leightons….CEO’s in… Read more »
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