Home' Future Building: The Australian Infrastructure Review : Volume 8 Number 1 Contents futurebuilding 29
I will provide an overview of the global economic outlook, and
an overview of the Australian economy, before looking at how
the Australian economy is providing opportunities to invest in
infrastructure. We will look at market activity and draw together
some themes from an infrastructure perspective.
Firstly, how are we feeling about the world? The world is
feeling pretty good. The global volatility index is well below its
long-term average, notwithstanding some recent small spikes
due to the North Korea–Trump rhetoric, and the Barcelona
terrorist attacks. This is reinforced by the fact that, over the last
five years in particular, the global economy has continued to
grow. We have had consistent global Gross Domestic Product
(GDP) growth of 3.5 per cent, which is forecast to continue. This
is in line with the long-term global GDP growth since 1980.
A growing economy is a good thing from an infrastructure
perspective. As our economies grow, we need more
infrastructure, and we are growing at a rate that supports
continued infrastructure investment. One of the drivers is
population growth. Australia has had consistent population
growth of about 1.5 per cent, which is above the advanced
economy average (about 0.5 per cent), and the emerging and
developing economy average (about 1.3 per cent).
The other key driver is that globally, both the manufacturing
and services sectors are expanding. This is true across the
major economies, including the United States, China, the
European Union and Australia.
Additionally, the cost of capital is at an all-time low. Although
we are expecting a slight increase in the 10-year government
bond yields, after having already witnessed a slight increase in
the US Federal Funds Rate, the increases are minimal to date.
What about Australia’s key trading partners?
In the United States, unemployment is at a 16-year low.
Employee confidence has returned to historic highs, indicating
a tightening in the labour market. Although the United States’s
housing market is still significantly below the long-term average,
it has started to pick up.
In China, we are seeing growth slow down; increasingly, it
is being maintained at much more sustainable levels because
growth is driven by consumption, rather than government
investment. The percentage of global trade out of China has
overtaken the United States, Germany and Japan, which
emphasises China’s importance on the global stage, both
economically and geopolitically.
China is also moving to a more service-based economy.
Using education as a proxy indicator, the percentage of college
graduates as a proportion of the population is increasing
significantly – a continuing trend since the 1980s and 1990s.
This is also reflected in the manufacturing and construction
components of GDP, which are coming down as services
become the key drivers in China’s economy. Services now
contribute more than 50 per cent towards China’s GDP. It is also
worth noting that, while manufacturing has dropped off, China
has maintained its infrastructure spend over the last five years.
The perception is that Europe is in a sluggish, slow-growth
situation, but it is doing alright. Growth is around two per cent,
which is in line with expectations from the European economy.
Inflation is now tracking at about two per cent, having emerged
from a deflationary period, and this means more consumption
and more growth.
What does that mean from an infrastructure point of
This is a trend that we will explore as we move to examine
Australia. Australia compares well globally in terms of the
percentage of GDP spent on infrastructure. We spend about
3.5 per cent of GDP on infrastructure, which is well above the
global average, as well as that of Germany, the United Kingdom
and the United States.
Growth in the Australian economy is trending well, with the
latest GDP figures quite positive. Forecasts from Macquarie
research put GDP growth in the 2.5 to 3.5 per cent range going
forward, with inflation safely in the two to three per cent band
over the same period.
The key challenge facing the Australian economy
is consumption, including household attitudes towards
consumption. There are a number of reasons for this. Firstly,
disposable income, and therefore expenditure, is tracking down.
This is due to what people are feeling day to day, including
an increased cost of living as a result of higher housing and
energy prices. We all know that housing prices, particularly in
Sydney and Melbourne, have increased dramatically. Energy
prices have traditionally tracked the consumer price index, but
have begun to diverge from this as a result of big investment
in the networks businesses, increasing the cost of distribution,
transmission and also recent increases in wholesale energy
prices. The second reason for low consumption is that
household debt remains historically high.
The big drivers of demand for increased investment in
infrastructure still remain: 1.5 per cent population growth
has been very consistent and will continue. There will be an
additional 40 million people in Australia by 2060, with two-thirds
of this increase to occur in capital cities. In terms of internal net
migration, South East Queensland and Victoria are growing,
largely at the expense of Western Australia, South Australia
and the Northern Territory. We are the most urbanised nation
on Earth, and that trend is expected to continue.
Moving now to what is happening in the markets. We have
seen construction activity trending down since 2012 as the
mining boom eased off. Urban projects in New South Wales and
Victoria are now the drivers of construction activity. Following
the resources boom, construction activity has been largely
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