20 18 WESTERN AUSTRALIAN INFRASTRUCTURE REPORT - CCF WA
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20 WESTERN AUSTRALIAN
INFRASTRUCTURE
18 REPORT
Aubin Grove Train Station and Russell Road Upgrade. Photo courtesy of Georgiou Group
Civil Contractors Federation Western Australia Branch 70 Verde Drive Jandakot, WA 6164 Phone: (08) 9414 1486 Fax: (08) 9414 1496 Email: ccfwa@ccfwa.com.au Web: ccfwa.com.au Twitter: @CCFWA BIS Oxford Economics Pty Ltd Level 8, 99 Walker Street North Sydney NSW 2060 Contact: Adrian Hart Associate Director – Construction, Mining and Maintenance Phone: (02) 8458 4233 Fax: (02) 9959 5795 Email: ahart@bisoxfordeconomics.com.au Web: bis.com.au Twitter: @BIS_OE © November 2017 Civil Contractors Federation WA. All rights reserved. This report has been prepared by Adrian Hart and Rubhen Jeya from BIS Oxford Economics. It has been prepared on the basis of publicly available information. BIS Oxford Economics has relied upon and assumed, without independent verification, the accuracy and completeness of all such information. It contains selected information and does not purport to be all-inclusive or to contain all of the information that may be relevant to the Purpose. The recipient acknowledges that circumstances may change and that this report may become outdated as a result. BIS Oxford Economics is under no obligation to update or correct this report. BIS Oxford Economics, its related bodies corporate and other affiliates, and their respective directors, employees, consultants and agents (‘Oxford Economics Group’) make no representation or warranty as to the accuracy, completeness, timeliness or reliability of the contents of this report. To the maximum extent permitted by law, no member of the Oxford Economics Group accepts any liability (including, without limitation, any liability arising from fault or negligence on the part of any of them) for any loss whatsoever arising from the use of this report or its contents or otherwise arising in connection with it. This report may contain forward-looking statements, forecasts, estimates and projections. No independent third party has reviewed the reasonableness of any such statements or assumptions. No member of the Oxford Economics Group represents or warrants that such Forward Statements will be achieved or will prove to be correct. Actual future results and operations could vary materially from the Forward Statements. Similarly, no representation or warranty is made that the assumptions on which the Forward Statements are based may be reasonable. No audit, review or verification has been undertaken by the Oxford Economics Group or an independent third party of the assumptions, data, results, calculations and forecasts presented or referred to in this report.
20 WESTERN AUSTRALIAN
INFRASTRUCTURE
18 REPORT
Contents
20 WESTERN
Executive summary
INFRASTRUCTURE
AUSTRALIAN 6
18
1. WA economic outlook 10
REPORT
Outlook for the global economy
Outlook for commodity prices
11
13
Outlook for the Australian economy 14
Outlook for WA 16
Need for an open policy conversation to drive sustainable long-term growth 18
Key risks to the WA economic outlook 20
2. WA infrastructure outlook 24
Recent trends and outlook for construction activity 25
State of play and outlook for infrastructure
and mining construction 28
WA construction cost trends 32
3. WA major projects (project value >$50 million) 34
Executive summary
T
his is the third WA Infrastructure Report published by the CCF WA in
conjunction with BIS Oxford Economics research, forecasting and analysis.
Western Australia’s civil construction industry continues to face myriad
challenges as the WA economy transitions from the mining boom to more
balanced and sustainable growth.
Across Australia, the aggregate economic and construction story represents a balance
of what are highly imbalanced state markets. As the mining investment boom has
receded, economic and population growth has slowed sharply in the former resources-
focused boom states such as WA. Excess supplies of housing and commercial space
built up during and just after the boom will take time to unwind, deterring private
investment, while weaker state government balance sheets give less room to
manoeuvre for State-funded public investment.
By contrast, the lower post-boom Australian dollar has reinvigorated New South Wales
Positive investment and Victoria, with renewed growth in trade-exposed industries driving a new wave in
drivers are providing a private investment. Asset recycling coupled with stronger state government revenues
boost to national civil is also driving a boom in public investment in these states. Together these positive
construction activity but investment drivers are providing a boost to national civil construction activity.
investment, construction
The positive news for contractors and suppliers to the civil construction industry in
activity and economic
WA is that the worst is now behind us. Growth is rebalancing, and the construction
growth are likely to
industry has taken steps to reduce excess capacity. But growth in demand and
remain soft in WA for the
construction activity is not expected to rise spectacularly either. Rather, investment,
next two years
construction activity and economic growth are likely to remain soft for the next
two years in WA as the excess supply of housing and commercial space is gradually
absorbed and the State Government takes steps to improve budget finances.
Key findings
• Total construction work done in WA fell nearly 30 per cent or $14.4 billion during
Total construction work
2016/17. The fall in oil and gas construction contributed nearly $8 billion of the
done in WA in 2016/17
decline alone, but pipelines, other mining and heavy industry construction, residential
was 40 per cent lower
building and non-residential building also fell. Total construction activity in 2016/17
than the 2013/14 peak.
was 40 per cent lower than the 2013/14 peak.
However, excluding oil
and gas construction, WA • However, excluding oil and gas construction, WA engineering construction is
engineering construction expected to rise through the next five years. Initially this growth will be focused in key
is expected to rise publicly-funded civil construction markets such as telecommunications, roads and
through the next five railways construction – where Commonwealth funding support is significant – but
years will eventually extend into rising non-LNG mining and heavy industry construction
as commodity prices and depletions at existing mines underwrite the next round of
resources projects.
• The challenge will be to sustain WA public infrastructure investment beyond the
current wave of projects across transport and telecommunications. Publicly funded
civil infrastructure construction activity rose 7.7 per cent in 2016/17 to the highest
level since 2009/10, but is expected to fall again as large construction projects such as
the NBN rollout and the Forrestfield Airport Link wind down.
• Sharply falling total building and construction activity in WA in recent years – along
with the lost ‘multiplier’ benefits construction spending has on the economy – has
driven a record contraction in State final demand, a key determinant of employment.
While WA is now over the worst period of contraction, further falls in residential
building activity and other parts of the construction industry will keep growth in
demand and the broader economy soft.
6 BIS Oxford Economics – CCF WA
• Sharply falling total building and construction activity in Western Australia in recent years –
along with the lost ‘multiplier’ benefits construction spending has on the economy – has
driven a record contraction in State Final Demand, a key determinant of employment. While
Western Australia is now over the worst period of contraction, further falls in residential building
activity (and other parts of the construction industry) will keep growth in demand and the broader
economy soft.
• Falling
• Falling activity
activity across
across building
building andandconstruction
construction hashasimpact on employment
impacted employment in the Western
in the
Australian construction industry. In 2016/17, average construction
WA construction industry. In 2016/17, average construction employment fell 10.5 employment fell 10.5 perper
cent
to 133,000 persons – the biggest single year decline since the 1990/91
cent to 133,000 persons – the biggest single year decline since the 1990/91 national national recession. Declining
building
recession. activity in
Declining comingin
activity years, which which
building, tends to be more
tends to beemployment intensive than
more employment the civil
intensive
than the civil construction segment, is expected to see a further 10,000 construction a
construction segment, is expected to see a further 10,000 construction jobs put at risk, despite
steady
jobs put outlook for civil construction work.
at risk.
Key indicators WA: State
Key Indicators finalAustralia:
Western demand, gross
State FinalState product
Demand, and Product
Gross State engineering
and
construction activity, 2014/15
Engineering constantActivity,
Construction prices 2014/15 Constant Prices
Source: BIS Oxford Economics, ABS data
$ Billion
20% 60
WA Oil and Gas Work Done (RHS) WA Engineering Construction less Oil and Gas (RHS)
WA SFD A%Ch WA GSP A%ch
15% 45
Growth in State final
10% 30 demand – the sum of
household consumption,
government consumption
5% 15
and investment, both
public and private –
has been very weak or
0% 0
negative in recent years
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17e 19f 21f
-5% -15
-10% -30
Year ended June Source: BIS Oxford Economics, ABS data
Post-boom Policy Challenges
Post-boom
Western policy
Australia challenges
continues to face a number of challenges as it transitions away from a boom driven
by resources investment to more balanced economic growth. Investment, and the construction activity
WA continues to face multiple challenges as it transitions away from a boom driven
it generates, plays an important role in driving economic growth. In the short term, investment cycles have
by resources investment to more balanced economic growth. Investment, and the
large impacts on economic growth – particularly via multipliers impacting the rest of the economy. In the
construction activity it generates, plays an important role in driving economic growth.
medium to long term, investment cycles affect the sustainability of growth; that is, spending on new productive
capacity effectively
In the short term,creates the upper
investment bound
cycles for large
have economic growthonbefore
impacts economictightening capacity
growth – leads to
inflationary
particularlypressures.
via multipliers impacting the rest of the economy. In the medium to long
term, investment cycles affect the sustainability of growth; that is, spending on new
productive capacity effectively creates the upper bound for economic growth before
tightening capacity leads to inflationary pressures.
The resources investment boom and bust has certainly impacted the wider economy,
even in a resources-focused state such as WA. The mining boom wasn’t costless. The
associated rise in the Australian dollar drove a structural change away from dollar-
exposed industries, making room for the growth in industries servicing mining
investment. The investment bust and the associated fall in the Australian dollar is
reversing that structural change.
As WA transitions its economy away from resources investment, new drivers for As WA transitions from
economic growth, competitiveness, productivity and rising living standards are resources investment,
needed. While a falling Australian dollar will help speed the structural adjustment in new drivers for economic
the economy, there is more which can be done through domestic economic policies. In growth are needed
particular:
• Continuation of microeconomic reforms to boost competitiveness and productivity
Western Australian Infrastructure Report 2018 7
Executive Summary
• Reforming the fiscal tax/transfer system to minimise current inefficiencies,
improve fairness and ensure that governments can fund rising recurrent
expenditures (particularly in the areas of health and welfare) through the
economic cycle
• Boosting productivity growth, which has been relatively weak over the past
decade, through initiatives that encourage research and innovation, as well as
investing in productivity-enhancing infrastructure.
While easy to state as a policy prescription, it is difficult in practice for the WA
economy to diversify away from its largest industry, mining. Structural change is hard
and, following years of new investment, the WA economy is even more concentrated in
mining, and less diversified, than ever before. However, WA needs its other industries
to step up to help sustain growth in demand and employment. The lower post-boom
Australian dollar – albeit flirting with US$0.80 – is a key ‘X factor’, immediately
boosting the competitiveness of trade-exposed industries that were suppressed during
the mining boom. But more could, and should, be done as a matter of public policy
to assist the WA economy in its transition towards more balanced and sustainable
growth.
Public infrastructure Infrastructure investment can play an important role here to support economic growth
investment can play a in the short term, but it can also play a more vital strategic economic role in the
vital strategic economic long term by building on WA’s core strengths – affordable housing, low energy costs,
role in the long term and close proximity to Asian markets – which can stimulate business investment,
by stimulating private employment and population growth. Used effectively, public infrastructure investment
investment that builds on can stimulate private investment and can be an important tool in establishing sensible
WA’s core strengths policy settings that will help boost productivity and competitiveness in the long term.
A return to stable, if weak, economic growth from here provides an opportunity for
reassessing WA’s longer term economic plan and, in particular, looking at ways to
encourage and fund public and private investment that drives economic growth,
attracts population growth and stimulates employment. Without a coherent plan,
there remains a significant risk that future levels of investment will be inadequate, will
not capitalise on WA’s growth potential, and ultimately lead to a loss in productivity
and living standards. With public sector spending only making up a very small part of
the total WA economy, achieving a longer-term economic vision will depend crucially
on how the public sector can develop policies which stimulate private decisions on
where to invest and live.
The next waves of growth in the WA economy are already emerging. Now is the time to
get the policy settings right.
8 BIS Oxford Economics – CCF WA
Sunset Heritage Precinct Site Services Infrastructure Upgrade. Photo courtesy of Tracc Civil Western Australian Infrastructure Report 2018 9
1. WA economic outlook
T
he Western Australian economy suffered an unprecedented collapse in
demand during 2016/17, with State final demand (SFD)1 down 7.4 per cent
in the year, and a cumulative 15 per cent since the peaking of the resources
investment boom in 2012/13. By contrast, the next weakest episodes in SFD
was the 4.3 per cent decline during the national 1990/91 recession, and a three-year
period of zero growth in SFD following the Asian Financial Crisis.
The good news is that the WA economy is now through the worst of the downturn
in demand, investment and construction activity. The flipside to this is that demand
growth will not recover quickly nor strongly from here. The reality is WA, ever
buffeted by the fortunes of the mining industry, has just been through the largest ever
boom/bust cycle in resources investment. Several years of flat growth in demand (and
albeit slightly stronger growth in gross State product, which includes net exports)
as the WA economy re-absorbs surplus capacity built up during the boom and
recalibrates public finances is the natural reality check to the previous cycle.
It is important that A return to stable, if weak, economic growth from here does, however, provide an
public infrastructure opportunity for reassessing WA’s longer term economic plan and, in particular, looking
investment should not fall at ways to encourage public and private investment that drives economic growth,
below levels that threaten attracts population growth and stimulates employment. It is important that, while
long term productivity investment should naturally be lower than during the boom years, it should not fall
growth below levels that threaten long term productivity growth or the sustainability of
existing infrastructure and business assets.
Unfortunately, this is the risk facing sustainable productive infrastructure investment.
While public investment grew strongly in the 2000s, financed by ultimately
unsustainable growth in government revenues (and hence, consequently, debt), it
slumped by 15 per cent over 2014/15 and 2015/16. Growth has resumed in 2016/17,
with much riding on the Commonwealth Government’s financing of the NBN rollout, as
well as key road and rail projects, to drive this result. Long-term projections of public
investment contained in the 2017-18 State Budget suggest falling public infrastructure
investment towards the end of the decade.
Following the investment
of hundreds of billions While easy to state as a policy prescription, it is difficult in practice for the WA
of dollars in new economy to diversify away from its largest industry, mining. Structural change is
resources assets over difficult. If anything, following the investment of hundreds of billions of dollars in
the past decade, the WA new resources assets over the past decade, and surging mining exports as these
economy is even more assets move to their production phase, the WA economy is even more concentrated in
concentrated in mining, mining, and less diversified, than ever before.
and less diversified, than
ever before However, WA needs its other industries to step up to sustain growth in demand and
employment. The lower post-boom Australian dollar (albeit edging back to US$0.80) is
a key ‘X factor’, immediately boosting the competitiveness of trade-exposed industries
that were suppressed during the mining boom, such as agriculture and manufacturing,
as well as services such as tourism and education. But more could, and should, be done
as a matter of public policy to assist the WA economy in its transition towards more
balanced and sustainable growth.
1. According to the Australian Bureau of Statistics’ Australian System of National Accounts: Concepts,
Sources and Methods (Cat. No. 5216.0, 2015, pp481-482), state final demand (SFD) is the aggregate
level of final consumption expenditure and gross fixed capital formation within a state over a
specified period of time. It equals household final consumption expenditure (HFCE) plus government
final consumption expenditure (GFCE) plus gross fixed capital formation (GFCF). In simple terms,
SFD is the sum of private and public consumption and investment within a state, and is a measure of
demand in a state economy.
10 BIS Oxford Economics – CCF WAInfrastructure investment can play an important role here to support economic
growth in the short term, but it can also play a vital economic role in the long term by
building on WA’s core strengths – affordable housing, low energy costs, and proximity
to Asian markets – to stimulate business investment, employment and population
growth. Used effectively, public infrastructure investment can stimulate or “crowd in”
private investment in trade-exposed industries benefiting from the lower dollar and
can be an important policy tool to help boost productivity and competitiveness in the
long term.
The key points to WA’s economic outlook include:
World GDP is predicted
• Despite a range of risk factors (China, North Korea, US, Brexit), global economic
to grow at an average of
growth is predicted to strengthen over the next two years, providing support to
3.5 per cent over the next
the WA economy. Indicators currently point to robust and stable activity in the
five years
world economy, with world GDP predicted to grow at an average of 3.5 per cent
over the next five years.
• The Australian economy, nationally, has weathered the worst of the resources
investment bust, but its legacy will live on in resource regions that are now heavily
oversupplied in terms of housing and commercial/industrial space. While further
declines in mining investment are still to come as the $200 billion LNG investment
boom moves to completion, the worst is over.
• Unsynchronised investment cycles and slow structural change are keeping the In Australia, patchy
Australian economy soft. This is not a steady state economy, with large variations growth will likely
by state and industry. Private investment will continue to fall as the recent continue through to the
residential building cycle unwinds, while public investment is increasing. Patchy end of the decade before
quarterly growth figures will likely continue through to the end of the decade non-mining business
before non-mining business investment builds momentum sufficiently to drive investment builds
stronger growth. The resources investment boom was a massive distraction for momentum sufficiently to
the Australian economy, driving a process of structural change (through the high drive stronger growth
dollar) to service mining regions, production and exports. Now, with a lower
dollar, the challenge is to rebuild trade-exposed industries decimated during the
boom. This process has only just started.
• In WA, structural adjustment is more difficult and will take longer, with the
consequence that growth in domestic demand (SFD) and the broader economy
(GSP) will be constrained well below long-term averages until the end of the
decade. While the worst of the downturn in investment has passed, further falls
are expected over the next two years as the mining investment bust reaches a
trough, as residential and non-residential building moves lower, and as growth
in infrastructure investment is mixed. This environment, combined with much
stronger growth in investment and construction in the eastern states, is likely to
pose challenges for local construction contractors and other market participants
before a return to stronger growth in investment and the broader economy at the
end of the decade.
Outlook for the global economy
During the coming structural readjustment, the Australian and WA economies are
being supported by a relatively positive global economy. Despite several well-known
risk factors (conflict in North Korea, Chinese financial stability, US and global trade
policies), forward indicators point to robust and stable activity in the world economy.
Reflecting a boost in relatively broad-based support from global trade, world GDP
growth is anticipated to increase this calendar year and next, before moderating
slightly. The picture across countries and regions is mixed, but overall positive for the
Australian and WA economies, with relatively stronger growth expected amongst key
trading partners.
Although growth has slowed since 2010, emerging economies still posted growth of
Western Australian Infrastructure Report 2018 11WA economic outlook
4.2 per cent in calendar 2016. Declines in oil prices and more hawkish signals from
central banks in advanced economies may worsen the external backdrop for some
emerging economies, driving growth lower.
We predict growth in developed economies – at 2 per cent in calendar 2016 – will pick
up to around 2.5 per cent by calendar 2018 and 2019. Importantly, Australia’s trading
partner growth (weighted by exports share) will grow at a faster rate over the next
five years, due to the high weighting of the relatively fast-growing economies of China,
East Asia and India in Australia’s export mix.
In China, GDP growth has moderated in recent years from pre-GFC rates of around
Chinese economic growth 10 per cent, partly reflecting efforts to rebalance the economy towards household
is easing as it transitions consumption. Chinese economic growth is expected to soften gradually from 6.7
to a demand-driven per cent in calendar 2016 to 5.2 per cent by 2022. China’s real GDP growth is easing
economy as the country continues its transition to a demand-driven economy amid further
urbanisation, demographic changes and weaker growth in investment.
Japan’s GDP is forecast to grow by 1.4 per cent in calendar 2017 and by a similar rate
in 2018 as improving global demand and a weak yen support growth in exports and
business investment. Moreover, fiscal and monetary policy will remain helpful. Given
solid employment, we expect domestic demand to become an increasing driver of
growth.
Economic growth in India is expected to be just shy of 7 per cent in 2017.
India will outperform
Demonetisation and banking sector stresses are weighing on growth. But, the Indian
other large economies
economy is on the mend and will outperform other large economies including China,
due to a continued pick-up in consumption, higher infrastructure spending and a
reasonable outlook for exports.
Despite the stronger global environment, growth in the United States remains
constrained at around 2 per cent. US economic growth is forecast to be 2.2 per cent in
calendar 2017, accelerating to 2.4 per cent in calendar 2018. The combination of solid
increases in employment and moderate wage growth will drive household income,
consumer spending and residential investment. Business investment is forecast to
accelerate, driven by improving domestic demand and export gains from a stronger
global climate and rebounding energy sector activity.
US President Trump’s The uncertainty surrounding the likelihood, timing and magnitude of President
proposed fiscal stimulus Trump’s policy proposals explain why he is seen as the greatest upside and downside
measures have the risk to US and global growth in the short term. Political uncertainty represents a
potential to boost growth downside risk to business expansion. Trump’s proposed fiscal stimulus measures –
from 2019 especially those relating to large civil infrastructure projects – have the potential to
boost growth from 2019, given the long lead times in getting major infrastructure
projects ‘shovel-ready’ from the planning stages to commencement. Passing of
legislation, notably complex tax reforms, will also take time. Nevertheless, stronger US
economic growth is expected to be tempered by the Federal Reserve raising interest
rates towards more ‘normal’ monetary policy settings, and to ward off inflationary
pressures from easing fiscal policy. This tightening cycle also presents a risk for the
international economy; emerging economies potentially face the risk of rising capital
outflows as investors rebalance portfolios and shift balances to higher returns on
offer in advanced economies. Emerging economies may need to raise rates – higher
than what would be typically warranted by domestic circumstances – to prevent the
destabilisation of capital outflows, falling asset prices and weaker confidence.
Encouragingly, the Eurozone is expanding at the fastest pace since the global financial
crisis. Export conditions are improving, investment is recovering, and weaker inflation
and strong consumer confidence and employment are increasing household spending.
However, the recent rise in the euro is likely to have an adverse impact on exports in
the near term.
12 BIS Oxford Economics – CCF WAstrong consumer confidence and employment are increasing household spending. However,
the recent rise in the euro is likely to have an adverse impact on exports in the near term.
FigureFigure
1.1: Economic growth
1.1: Economic byby
Growth global
Globalregion
Regionand Australia,Calendar
and Australia, calendar years
Years
Annual growth in Real GDP
6%
4%
2%
0%
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
-2%
World OECD Australia
-4%
Year ended December Source: BIS Oxford Economics, OECD, Consensus
Outlook for Commodity Prices
Improvements in global economic conditions have – in conjunction with international policy
developments – also helped drive a recovery in commodity prices through 2016/17. This has
Outlook
had fornegative
positive and commodity
impacts onprices
the Australian economy.
On the one hand, in
Improvements higher prices
global have underpinned
economic higher-than-anticipated
conditions have – in conjunctionmining industry
with profits,
international
royalties, exploration activity and helped accelerate development of the next round of mining projects.
policy developments – also helped drive a recovery in commodity prices through
On the downside, higher commodity prices (in conjunction with delays to the interest rate tightening
2016/17. This has had positive and negative impacts on the Australian economy.
cycle in the US) has also driven an appreciation of the Australian dollar towards (and above)
US$0.80,
On the one which is likely
hand, to have
higher a contractionary
prices impact onhigher-than-anticipated
have underpinned other trade-exposed industries, slowing
mining
the structural
industry readjustment
profits, needed
royalties, in the economy
exploration to achieve
activity more accelerate
and helped balanced growth.
development
of thefor
Prices next
mostround of mining
resource projects.
commodities On the
recovered downside,
from higher
their cyclical commodity
lows through 2016, prices
but over the
(in conjunction with delays to the interest rate tightening cycle in
December quarter 2016 and March quarter 2017, key commodities experienced significant the US) has rises,
also
particularly iron ore and coal – Australia’s flagship commodity exports (accounting for almost a thirdisof
driven an appreciation of the Australian dollar towards (and above) US$0.80, which
likely
the to of
value have a contractionary
exports impact The
of goods and services). on other
jump intrade-exposed industries, slowing
coal prices was underpinned by a the
structural readjustment
government-driven curtailmentneeded in the ineconomy
of production to achieve
China, while more demand
stronger global balanced
andgrowth.
disruptions
in Australia also played a part in the price increases of both coal and iron ore. China has since eased
Prices
its for most
production resource
restrictions andcommodities recovered
a large portion of supply hasfrom their back
now come cyclical lows through
onstream, causing
2016, but
average over
export the December
prices quarter
to pull back over 2016
the June and March
quarter 2017. quarter 2017, key commodities
experienced significant rises, particularly iron ore and coal, Australia’s flagship
BIS Oxford Economics believes the recent strengthening in the Australian dollar will be relatively
commodity exports, which together account for almost a third of the value of exports
short-lived. Iron ore and thermal coal prices are predicted to continue to retreat from recent peaks,
of goods and services.
while global prices for a number of commodities are expected to ease somewhat over 2017/18 before
recovering
The jumpover subsequent
in coal yearsunderpinned
prices was as the global oversupply in a number of commodities
by a government-driven dissipates.
curtailment of
production in China, while stronger global demand and disruptions in Australia also
played a part in the price increases of both coal and iron ore. China has since eased its
production restrictions and a large portion of supply has now come back onstream,
causing average export prices to pull back over the June quarter 2017.
Iron ore and thermal coal
BIS Oxford Economics believes the recent strengthening in the Australian dollar will prices are predicted to
be relatively short-lived. Iron ore and thermal coal prices are predicted to continue continue to retreat from
to retreat from recent peaks, while global prices for a number of commodities are recent peaks
expected to ease somewhat over 2017/18 before recovering over subsequent years as
the global oversupply in a number of commodities dissipates.
Western Australian Infrastructure Report 2018 13WA economic outlook
Figure 1.2 Commodity prices
Figure(A$)
1.2 Commodity Prices (A$)
Quarterly Average Prices (Log Scale)
640 1.20
AUD Quarterly Average (RHS)
320 Coking Coal 1.00
(A$/t)
160 0.80
80 0.60
Crude Oil (Brent)
Thermal Coal (A$/bbl)
40 (A$/t) 0.40
Iron Ore
20 (A$/t) 0.20
10 0.00
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
As at June Source: BIS Oxford Economics, OCE data
Outlook for the Australian Economy
Outlook
The Australian for thegrew
economy Australian
by just 2.0 per economy
cent in 2016/17 – the weakest rate of growth since
2008/09. While a weak outcome, this result extends Australia’s long period of uninterrupted economic
The Australian
growth to 26 yearseconomy grew
– a new world by just 2 per cent in 2016/17 – the weakest rate of
record.
growth since 2008/09. While a weak outcome, this result extends Australia’s long
Large slices of luck and lessons learned from the last recession (in 1990/91) have helped successive
period of uninterrupted economic growth to 26 years – a new world record.
Australian governments and the Reserve Bank of Australia steer the economy through the 1997/98
Asian crisis, the 2000/01 downturn, the global financial crisis in 2008, and a large bust in resources
Large slices of luck and lessons learned from the last recession in 1990/91 have
investment since 2012/13.
helped successive Australian governments and the Reserve Bank of Australia steer
Overall, however,
the economy the Australian
through economyAsian
the 1997/98 has been unable
crisis, theto2000/01
sustain economic growth
downturn, theabove 3 per
global
cent since the peaking of the resources investment cycle in 2012/13. Much of this
financial crisis in 2008, and a large bust in resources investment since 2012/13. weaker economic
performance is due to very weak growth in domestic demand during the period, which has been
Slower growth in the Overall, however,
negatively the
impacted by theAustralian economy
ongoing decline has been
in resources unable to sustain economic growth
investment.
Australian economy has abovepartially
While 3 per cushioned
cent sincebythe peaking
a boom of the resources
in residential investmentinvestment
since 2013/14cycle
and, in 2012/13.
more recently, by a
been due to very weak Much ofinthis
recovery weaker
public economic
infrastructure performance
investment, economic isgrowth
due tohasvery weak
also beengrowth
hamperedin by
domestic
record low
growth in domestic demand
growth during
in wage the period,
incomes, which has
with households been negatively
spending more of what impacted
they earn by
andthe ongoing
reducing decline
savings to
demand in resources
maintain investment.
just moderate household expenditure growth. Weak wage growth has also driven weaker
than budgeted tax revenues for governments, lengthening the time horizon required to return to
While partially
sustainable budgetcushioned by alimiting
surpluses, and boomthe infirepower
residential investmenttosince
of governments 2013/14
counter and,
weak private
more recently,
investment by a public
with higher recovery in public
investment infrastructure
without investment,
further increasing economic growth
public debt.
has also been hampered by record low growth in wage incomes, with households
spending more of what they earn and reducing savings to maintain just moderate
household expenditure growth. Weak wage growth has also driven weaker-than-
budgeted tax revenues for governments, lengthening the time horizon required to
return to sustainable budget surpluses, and limiting the firepower of governments
to counter weak private investment with higher public investment without further
increasing public debt.
Unlike many other resources-exporting economies, Australia did not experience a
recession in the wake of the resources investment bust. Strong growth in mining
production and exports from world class, competitive deposits, supercharged by a
much lower dollar – which also stimulated other exports of goods and services – has
14 BIS Oxford Economics – CCF WAhelped offset some of the pain from weaker demand growth. Economic growth, which
includes net exports, has generally been higher than growth in domestic demand.
The challenge for Australia is that mining exports, particularly, are highly capital –
rather than labour – intensive. Stronger, sustainable growth in employment requires
stronger growth in local expenditures; in domestic demand. In turn, this requires the
return of growth in non-mining business investment, which has remained stalled since
the GFC.
The problem for non-mining industry sectors has generally been weak growth in
demand, weak profits and excess capacity. In that environment, it is foolhardy for Despite low interest rates,
businesses to invest ahead of requirements, straining cash flows and locking in most businesses are still
additional costs before they have the revenue to support them. Most businesses are in cost-cutting mode,
still in cost-cutting mode, preserving cash and deferring investment until demand deferring investment
recovers. Low interest rates in this environment have had relatively little impact. until demand recovers
While there has been plenty of funds available, this just hasn’t been the business
environment for investment. That will come later.
The next growth phase in the Australian economy will be driven by non-mining
business investment. When it does recover, it will be to service growing demand,
driven by a growth logic – evidenced by rising profits – and augmented by a
technology catch-up. In turn, this will have a strong multiplier through business
services into the rest of the economy. While non-mining business profits did increase
in the June quarter 2017, it is still too early to say that businesses are confident in the
path of future demand and profits, and are willing to make the psychological shift from
caution to a ‘go for growth’ investment mentality.
Part of the reason for this is that nationally, by region and industry, growth and
profitability is highly fragmented. New South Wales and Victoria, after spending much
of the mining boom years suppressed, have returned to very strong economic growth.
But growth in demand is still very weak in many other regions. In some states such as
WA and Queensland, state final demand has outright declined.
Challenges remain ahead for the Australian economy, too, which are likely to keep
business confidence and investment on a weak plane over the next two years. Wage
growth, except for skilled professions and trades in some sectors and states, is likely
to remain relatively weak, affecting retail trade and household expenditures. Politics is
highly adversarial, with major political parties unable to forge a workable consensus
on many important policy areas surrounding taxation, energy security, and the
environment. But, more importantly, investment cycles across Australia are likely to
remain highly unsynchronised over the next two years – keeping overall economic
growth constrained to around 2.5 per cent per annum on average over 2017/18 and
2018/19.
These unsynchronised investment cycles include:
• Residential investment, a key driver of growth over the three years to 2015/16,
which is expected to have peaked in 2016/17 and then decline over the next
three years, with particularly large declines expected in the volatile high-density
apartment market.
• Mining investment is now entering its fifth year of an expected six-year decline,
Mining equipment
with further significant declines to come over the next 18 months as the LNG
purchases and
investment boom finally runs its course. This will see mining construction fall
exploration have started
around 78 per cent from the 2013/14 peak to the 2018/19 trough. However,
to recover
mining equipment purchases and exploration have started to recover across most
commodities, indicating the initial stages of the next upturn.
• Public investment finally started to recover in 2015/16 after five years of decline,
surging 14 per cent in 2016/17 alone. Growth in public investment is being
supported by new transport infrastructure, but will be offset in part after 2017/18
by falling investment in Australia’s largest public infrastructure project – the NBN.
Western Australian Infrastructure Report 2018 15WA economic outlook
• Public investment finally started to recover in 2015/16 after five years of decline, surging 14
per cent in 2016/17 alone. Growth in public investment is being supported by new transport
infrastructure, but will be offset in part after 2017/18 by falling investment in Australia’s
Totallargest
public investment is expected to be flat or falling, and hence be a drag on
public infrastructure project – the NBN. Total public investment is expected to be flat
Australia’s
or falling (and hencegrowth,
economic be a dragbyonthe end of economic
Australia’s the decade.
growth) by the end of the decade.
• Non-mining business investment is currently showing only modest growth but
• Non-mining business investment is currently showing only modest growth but is expected to
is expected to strengthen from late decade as higher profitability, demand and
strengthen from late decade as higher profitability, demand and capacity utilisation (in turn
capacity utilisation a change
supported by a slightly weakerinAustralian
psychology.
dollar) drive a change in psychology.
Figure 1.3: Australia – basic economic indicators
Figure 1.3: Australia – Basic Economic Indicators
Per Cent Forecast
8 15
Real GNE
6
4 10
2
Real GDP
0 5
-2
External Contribution
-4 0
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Year ended June Source: BIS Oxford Economics, ABS data
Contribution to Domestic Demand - Per Cent Forecast
2 20
18
16
Public Consumption 14
1 12
10
8
0 6
4
Public Investment 2
-1 0
89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
Year ended June Source: BIS Oxford Economics, ABS data
Consequently, domestic demand growth will improve markedly late in the decade, as the declines in
mining and residential investment bottom out and start showing signs of recovery. Capacity
constraints and expected improvements in business confidence are predicted to drive an acceleration
Consequently,
in domestic
non-mining business demand
investment. Butgrowth
until thatwill improve
time, economic markedly
growth and late in thearedecade,
inflation expectedasto
remain relatively
the declines insubdued, with the
mining and Reserve Bank
residential unlikely to
investment be in a out
bottom strong
andposition to raise interest
start showing signs
rates until 2019/20.
of recovery. Capacity constraints and expected improvements in business confidence
The Reserve Bank is
unlikely to be in a strong are predicted
Outlook for WAto drive an acceleration in non-mining business investment. But until
position to raise interest that time, economic growth and inflation are expected to remain relatively subdued,
Differences in the timing and magnitude of regional investment cycles are creating large differences in
rates until 2019/20 with the Reserve Bank unlikely to be in a strong position to raise interest rates until
economic performance and construction activity by state. Strong pipelines of infrastructure projects,
2019/20.
relative undersupply in housing, higher population growth and private sector confidence to invest is
driving a construction upswing in New South Wales and Victoria, which in turn is spilling over into
broader industry growth.
Outlook for WA
Differences in the timing and magnitude of regional investment cycles are creating
large differences in economic performance and construction activity by state. Strong
pipelines of infrastructure projects, relative undersupply in housing, higher population
growth and private sector confidence to invest is driving a construction upswing in
New South Wales and Victoria, which in turn is spilling over into broader industry
growth.
The eastern states – led by NSW and Victoria – are at the start of a tremendous
The eastern states
wave in land transport investment, as shown in Figure 1.5 (page18), which is being
boom in land transport
supercharged by asset recycling strategies and strong growth in own-source revenues
infrastructure investment
from property taxes, in turn driven by robust increases in population growth. This
is drawing in resources
boom in land transport infrastructure investment is drawing in resources from other
from other states,
states, including WA, which will create its own challenges as other states begin to
including WA
increase their own infrastructure investment.
16 BIS Oxford Economics – CCF WAdriving a construction upswing in New South Wales and Victoria, which in turn is spilling over into
broader industry growth.
Figure
Figure 1.4: Comparisons
1.4: Comparisons of State
of State (SFD)(SFD) and national
and National (GNE)
(GNE) Growth growth
in Final in final
Demand
demand
16%
Australia Gross National Expenditure Queensland State Final Demand
14%
Western Australia State Final Demand South Australia State Final Demand
12%
10%
8%
6%
4%
2%
0%
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
-2%
-4%
-6%
-8%
Year ended June Source: ABS, BIS Oxford Economics
Australia Gross National Expenditure Victoria State Final Demand NSW State Final Demand
9%
7%
5%
3%
1%
-1% 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19
-3%
-5%
Year ended June Source: ABS, BIS Oxford Economics
The eastern states – and particularly New South Wales and Victoria – are at the start of a tremendous
By contrast,
wave in land transportinvestment
investment,growth
as shownand construction
in Figure 1.5, whichactivity
is being remains relatively
supercharged by assetweak
recyclingor
strategies and
falling in strong
the growth
former in own source
resources boomrevenues from
states of property taxes
Queensland and(inWA.
turnThese
driven by
states
robust increases
are nowingenerating
population growth).
strong This boomininmining
growth land transport infrastructure
production investment
and exports as aisdirect
consequence of the previous resources investment boom, boosting GSP. However, Strong growth in mining
growth in SFD – the sum of household consumption, government consumption production has boosted
and investment, both public and private – has been very weak or negative in recent WA’s gross State product
years. This is important, as growth in SFD tends to be a greater driver of growth in but growth in State final
employment and incomes than growth in capital-intensive mining exports. demand has been very
weak or negative in
Real SFD in WA has been in decline since 2013/14, but the pace of contraction recent years.
intensified in 2015/16 (minus 4 per cent) and 2016/17 (minus 7.4 per cent) as
the resources investment bust hit hardest and, in 2014/15 and 2015/16, public
investment also contracted. Overall, the 2016/17 outcome was the worst in the State’s
history, while the 15 per cent cumulative decline since 2012/13 is also a record – in
terms of both the period of contraction (four years) and magnitude.
Western Australian Infrastructure Report 2018 17drawing in resources from other states, including Western Australia, which will create its own
WA economic outlook
challenges as other states begin to increase their own infrastructure investment.
Figure 1.5:
Figure 1.5:Major
Major transport project Construction
Transport Projects construction(over $2 billion in Construction Value)
(over $2 billion in construction value)
$ Billion (in FY15 constant prices) Forecast SA North-South Corridor
10.5 WA Forrestfield Airport Rail Link & Metronet
Notes: This chart is based on projects with WA Hancock Roy Hill (Pilbara)
over $2 billion in construction work done. WA Fortescue Metal Group (Pilbara)
Solid areas are road projects, dotted areas WA BHP Billiton (Pilbara)
9.0 are rail projects. WA Rio Tinto (Pilbara)
Source: BIS Oxford Economics VIC Melbourne Airport Link
VIC Inland Rail (VIC component)
VIC Melbourne Metro Rail
7.5 VIC Level Crossing Removal Program
VIC Regional Rail Link
VIC North East Link
VIC Western Distributor
6.0 VIC EastLink
QLD Acacia Ridge to Port of Brisbane
QLD Cross River Rail
4.5 QLD Inland Rail (QLD component)
QLD Warrego Highway
QLD Gateway Motorway
QLD Bruce Highway Upgrade
3.0 QLD TransApex
QLD Ipswich Motorway
NSW Inland Rail (NSW component)
NSW Sydney Metro West
1.5 NSW Sydney Metro City & Southwest
NSW Sydney Metro Northwest
NSW F6 Extension
NSW Western Harbour Tunnel & Beaches Link
0.0 NSW Western Sydney Infrastructure Plan
2006 2009 2012 2015 2018 2021 2024 2027 NSW NorthConnex
NSW WestConnex
Year ended June Source: BIS Oxford Economics NSW Pacific Highway Upgrade
By contrast, investment growth and construction activity remains relatively weak or falling in the
former resources boom states of Queensland and Western Australia. These states are now
The good news is that the worst of the decline in SFD has now passed in WA. But it
generating strong growth in mining production and exports as a direct consequence of the previous
is too early to say strong growth in demand (and employment) is going to return
resources investment boom, boosting Gross State Product (GSP). However, growth in State Final
anytime soon. Rather, the immediate prospects for the WA economy is for flat growth
Demand (SFD, the sum of household consumption, government consumption and investment – both
in SFD at best over the next two years as the tail end of the LNG investment bust
public and private) has been very weak or negative in recent years. This is important, as growth in
(expected to strip another $10 billion in measured investment) and further falls in
SFD tends to be a greater driver of growth in employment and incomes than growth in capital-
residential building offset weak growth in household and government spending.
intensive mining exports.
Flat growth would be a Improved prospects for new mining investment through sustained higher commodity
substantial improvement Real SFD
prices hasinthe
Western Australia
potential has been
to provide in decline
some upsidesince 2013/14,
to this butbut
outlook, the this
pacewill
of contraction
be an
– and confidence builder intensified
improvement in 2015/16
at the(minus
margins4 per cent) Only
at best. and 2016/17
once the (minus 7.4 perof
full impact cent)
the as the resources
resources bust
– compared to the sharp investment bust hit hardest
has been absorbed, and,
as well as in
its2014/15
impactand 2015/16,sectors
on affected public investment also contracted.
such as housing, can it beOverall,
contraction over the past the
said2016/17
that the outcome was theisworst
WA economy backintothe state’s history,
sustainable, while the
stronger 15 perEven
growth. cent so,
cumulative decline
flat growth
few years. since
from 2012/13
here wouldis also
beaarecord – in terms
substantial of both the –period
improvement of contraction
and confidence (four years)
builder and magnitude.
– compared
to the
The sharp
good contraction
news of theofstate
is that the worst economy
the decline overhas
in SFD thenow
past few years.
passed in Western Australia. But it is
too early to say that strong growth in demand (and employment) is going to return anytime soon.
Broader measures of economic activity, such as GSP, which includes the value of
Rather, the immediate prospects for the Western Australian economy is for flat growth at best in SFD
net exports on top of domestic demand, will recover more quickly in WA given
over the next two years as the tail end of the LNG investment bust (expected to strip another $10
strong export growth, particularly gas exports as new LNG facilities ramp up to full
billion in measured investment) and further falls in residential building offset weak growth in
production. The lower post-boom Australian dollar is also stimulating exports and
household and government spending. Improved prospects for new mining investment through
investment in other trade-exposed industry sectors that were hit hard during the
sustained higher commodity prices has the potential to provide some upside to this outlook, but this
boom years. WA – and Perth particularly – has already seen a strong recovery in new
will be an improvement at the margins at best. Only once the full impact of the resources bust has
accommodation building, and future growth in exports of services such as tourism,
been absorbed, as well as its impact on affected sectors such as housing, can it be said that the
education and business services in addition to agriculture, mining and manufacturing
Western Australian economy is back to sustainable, stronger growth. Even so, flat growth from here
products will also assist recovery in the broader WA economy over the next few years.
18 BIS Oxford Economics – CCF WANeed for an open policy conversation to drive sustainable
long-term growth
By the end of the decade, BIS Oxford Economics expects the WA economy will be back
to achieving more ‘normal’ rates of sustainable growth – both in terms of domestic
demand (SFD) and the broader economy (GSP). But the next few years will remain
challenging. This tough reality is reflected in the recently released 2017-18 State
Budget, which itself forecasts another decline in SFD in 2017/18 – stretching the total
decline over five consecutive years – before eking out very weak (1 per cent) growth in
2018/19.
While containing several positive initiatives to support new growth industries
(tourism, education, defence, science and innovation), the 2017-18 State Budget did
not offer a completely convincing strategy for delivering sustainable economic growth
over the long term. Some measures, such as the new payroll tax provisions, higher
gold royalties and increased utility charges, while aimed at budget repair, may have a
contractionary impact on the State economy in the near term.
While new road and rail infrastructure investment in the State Budget is welcome The State Budget projects
in the near-term, the Budget projects a substantial decline in general government a substantial decline
infrastructure investment over the forward estimates, which will be a drag on growth in general government
during the recovery phase of the State economy and potentially to levels representing infrastructure investment
underinvestment in infrastructure. Some promised infrastructure projects, such as the over the forward
Ellenbrook rail line, although credibly proposed were not funded in the State Budget, estimates
raising concerns that their timelines may be pushed back as the State Government
concentrates on budget repair.
With the State economy now past the worst of the resources investment downturn,
there is no better time to have an open and transparent discussion on the long term
economic strategy for WA. This should concentrate on leveraging from (or improving)
WA’s core or potential strengths compared to eastern state rivals such as its:
• More affordable housing.
• Lower “cost of living” and “cost of doing business” pressures, particularly with
regards to transport, utilities (notably energy), commercial rents, and government
charges.
• Closer proximity to Asia and further afield, with Perth in the unique position
within Australia to offer direct flights to London from early 2018.
• Abundant natural resources, including mineral wealth and iconic tourism
destinations.
• Enviable lifestyle benefits.
The core aim of the economic strategy should be to attract businesses and people
back to WA following the exodus of population and consequent very weak population
growth in aggregate since the end of the resources investment boom.
Overall, the public sector only makes up a very small part of the total WA economy –
around 16 per cent in expenditure terms – and this is not expected to change in the
future. Consequently, achieving longer term economic goals will depend crucially on
how the public sector can develop policies to stimulate private decisions on where to
invest and live.
Sustained investment in
While acknowledging the measures announced in the State Budget, sustained productive infrastructure
investment in productive infrastructure will be a critical component of a broader will be a critical
economic strategy. This includes sustained investment in transport and utilities to component of a broader
ensure cities and regional centres offer competitive benefits compared to eastern state economic strategy
counterparts and help keep cost of living (and cost of business) pressures contained.
It also means investing in critical infrastructure for new growth regions to stimulate
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