A longer-term perspective on the CAPEX plunge

capex_%_gsp

In a comment on my post from last Friday, regular Queensland Economy Watch reader Jim pointed out that the plunge in capital expenditure (CAPEX) is simply returning Queensland to more normal rates of investment, as was completely expected. Jim suggested I could present a longer time series to demonstrate this, as I’ve done above (N.B. the chart is based on ABS and Qld Treasury data, with June 2015 GSP estimated by extrapolation from December 2014 and March 2015 estimates). Here is what Jim had to say in his comment:

It would be interesting to look at your time series graph over a longer period. 2005 (the start of your series) is actually well within the construction phase for the Queensland mining and energy boom. I suspect even the lowest point of the “building and structures” category you have shown is above long term averages (particularly if you separated out the housing construction). Like I’ve said before, what we are experiencing was 100% expected by any economist with a time horizon longer than a goldfish.

We seem to have a construction and engineering sector that was more than happy to privatise the gains of the upswing in the boom, that are now pushing to have the downside cushioned by State expenditure (particularly for dubious projects that don’t pass a basic benefit-cost test – think dams, stadiums and roads to nowhere).

Besides, the downturn in activity will actually have a few positive spin offs as the price of construction and the associated labour used should actually become more affordable to other sectors as the two-speed economy returns to more of a one-speed economy.

Everyone is getting overly gloomy about “the recession we are not even having”. But some of us are old enough to remember the “recession we had to have”. It is time we all had a bit of long-term perspective.

I agree largely with Jim on this, but I would note there is still the prospect of the CAPEX plunge continuing over the next twelve months across Australia, and the impact being broader than the resources sector. So there is still some justification for a level of gloominess.

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3 Responses to A longer-term perspective on the CAPEX plunge

  1. Jim says:

    Gene

    Nice one! So even in these supposedly hard times, CAPEX is running at 6% of GSP (still the highest level since 1997). Just eyeballing the long-term chart you have shown, It looks like the long-term average is probably about 4% of GSP, and less than 3% in the pre mining boom period.

    You are right, we should expect a further decline. But even a halving of the current “crisis levels” would still only bring us back to a long-term trend. Yes I’d be a bit gloomy if I was in the engineering and construction sector. But once the prices of work adjust to the new reality, work should pick up again, particularly on smaller projects that have been priced out of the market during the mining boom.

  2. NSSfT says:

    Great work Gene. Relax everyone, its just back to reality for Queensland. We became very, very lazy on once in a lifetime population and resources booms that came almost back to back. Growth like this can’t persist forever and we need to get back to using our brains not rely on cargo cults. It’s hard for those that over invested in the construction industry but thats capitalism, caveat emptor!

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