PENT up demand and a shortfall in new residential dwellings will partially offset a fall in the investment industry, according to leading forecasters BIS Shrapnel.
The latest BIS Shrapnel’s Long Term Forecasts, 2007 to 2022 report found whilst total investment will remain at high levels during the next five years, underpinning solid employment, income and spending growth – the investment industry will face a variety of challenges and risks.
The report’s co-authors and senior economist Richard Robinson and economist Rachael Logie warned that the near-term outlook for the Australian economy seems upbeat, there is a downside and they believe that business investment will remain at an elevated level for the next 12 to 18 months, before moderating in 2009
“Capacity constraints, and particularly labour shortages, leave the economy prone to inflationary pressures, which will keep the Reserve Bank on a tightening bias while the economy continues to nudge its speed limit.
“A marked pick up in inflation remains a real threat for the economy — either resulting from a speculative surge in investment or a sharp fall in the Australian dollar — which would draw a more aggressive response from the RBA and result in a more protracted economic downturn,” Robinson said.
BIS Shrapnel forecasts total investment will weaken during 2008/09 due to the completion of a number of key mining and infrastructure projects. This and a pick up in productivity — largely in export-oriented sectors — will ease pressure on labour markets, which together with higher interest rates will have a dampening effect on investment and consumer spending more generally.
“We are forecasting the slowdown in investment and consumer spending in 2008/09 will cause employment growth to slow later this decade and push the unemployment rate above 5%,” Robinson said. “However, we don’t expect the slowdown will lead to widespread job losses and this should help prevent a marked weakening in consumer spending,”
However, the report said this weakening in business investment will be partially offset by a new round of dwelling investment and the significant volume of public infrastructure spending currently underway, before business investment cycles up again early next decade.
This is due to the residential sector, which is likely to provide some offsetting stimulus to the slowdown.
Robinson said a shortfall in new dwellings in the key Brisbane and Sydney markets, coupled with strong net migration, has created significant pent-up demand for housing in these markets.
“Whilst affordability remains an issue, the strength of the rental market will encourage a new round of dwelling investment, despite limited scope for a drop in interest rates.
”With new mining and transport infrastructure capacity now coming on-stream, exports will also become increasingly supportive of growth. However, large parts of the tradeables sector will continue to struggle with the sustained high Australian dollar, which is likely to have long-term implications for parts of the industrial sector,” he continued.
Robinson said the strength of investment in recent years has largely represented a catch-up phase following an extended period of under-investment.
As a result, he does not believe the markets to be significantly oversupplied when the cycle peaks in 2008/09, enabling another phase of business investment to come through early next decade.
Australian Property Journal
