New housing investment to pick up this year as mining influence expected to fade over next two years: BIS Shrapnel

A second influential economic think tank believes the mining boom will start to fade in the medium-term, replaced by growth in other parts of the economy. including investment in new residential property.

Coming on the back of the Deloitte Access Economics business outlook report, which says the mining boom may be over in just two years, BIS Shrapnel expects mining investment to continue to grow over the next two years, but at a moderate pace.

In its Long Term Forecasts 2012-2027 report BIS Shrapnel expects the mining investment slack to be taken up by non-mining sectors of the economy, including a pick-up in investment in the residential property sector.

“Residential investment, triggered by recent interest rate falls, should start growing from late this year, driven by the dwellings shortage that has developed,” says Tim Hampton, senior economist at BIS Shrapnel.

“And non-mining business investment, currently below levels required to underwrite even moderate demand, will recover as interest rate reductions over the past year support demand and capacity constraints emerge." 

According to BIS Shrapnel, solid population growth underwritten by a rebound in immigration, combined with around average employment and wages growth, will continue to support growth in household expenditure.

However, due to persistently high household debt, BIS Shrapnel believes that expenditure growth will “not approach the giddy heights that it did during the debt-fuelled spending spree of the early-to-mid-2000s”.

BIS Shrapnel expects GDP growth to remain around its current rate of just above 3% for the next five years.

It warns that the biggest risks to the Australian economy – and a likley rebound for housing and non-mining sectors – remains the potential for the European economic crisis to have a larger-than-forecast negative impact on Australia

“We expect the European situation will get worse before it gets better, and will drag on for many years,” says Hampton.

“Irrespective of how their significant issues are resolved (eg. Euro break-up, further debt write-offs), the main channels of influence for Australia will be through reduced consumer and business confidence, lower commodity prices and tighter funding conditions."

“This would likely further delay the recovery in dwelling and non-mining business investment.”

The report identifies a marked slowdown in mining investment over the next two years.

It says that new private engineering construction, which after increasing by 50% over the past year, is expected to grow by 16% over the next year and just 8% the following year.

“At the same time, public sector investment – having been boosted by post-GFC stimulus packages – is now falling sharply as those packages wind down and all levels of government try to get their finances in order,” says BIS Shrapnel.

Hampton expects the recovery in residential property, combined with a revival in the non-mining sectors of the economy, to be strong enough to prevent the economy from stalling as it transitions to a more broadly-stronger footing.

Currently, Hampton says the economic picture is one “out of balance, undergoing significant structural change, with offsetting cycles averaging to a moderate outcome” driven by the high Australian dollar, which is impacting on competitiveness, thereby creating enormous pressure and resulting in job losses in trade-exposed industries like manufacturing, tourism, education and business services.

“Meanwhile, around 60% to 75% of the economy is sheltered from the impact of the high dollar. Those with economic power are doing well – the banks, the major supermarkets, utilities,” says Hampton.

“But SME businesses with little economic power and those that rely on servicing non-mining investment are largely languishing, with weak growth and profitability, particularly those whose gearing makes them vulnerable. Hence the continuing threat of insolvencies.”

These sheltered industries are the ones that will benefit most from lower interest rates and the forecast increase in non-mining private investment.

However, the outlook for non-mining trade-exposed industries remains poor, which BIS Shrapnel says will continue to suffer under the weight of the high Australian dollar and an uncertain global economy.

A more enduring risk, Hampton warns, is that the significant under-investment in the non-mining industries and infrastructure gradually erodes the medium-term growth potential of the economy, and leaves the Australian economy increasingly sensitive to large fluctuations in world commodity prices. Businesses will also need to make further gains in terms of energy efficiency, with energy prices expected to continue to rise strongly for the foreseeable future.

Finally, there is a risk of a collapse in minerals prices and investment as the cycle turns down. In that regard, BIS Shrapnel believes that increased supply, rather than lack of demand, poses the greatest downside risk to world commodity prices. However, a fall in world demand would initiate a much larger shock.