The collapse in resource sector spending has yet to run its course, with the looming completion of as much as $100 billion of outlays on gas projects to slash the level of engineering construction to the lowest level since 2009, a report by Deloitte Access Economics has found.
The decline follows a drop of almost a quarter in the year to September, to the lowest level since 2010, according to its its quarterly Investment Monitor.
Completion of the Gorgon, Prelude and Ichthys projects in 2017 are the main factors in the looming fall in investment in the sector, which will decline further in 2018 as work on the Wheatstone gas project also runs its course.
Even so, the worst of the decline is behind us, Deloitte Access Economics partner Stephen Smith said. "In fact there is only 15 per cent of the 'cliff' left to go (or just below 1 per cent of real GDP)," he said, referring to the extent of the decline.
The fall comes amid caution over the outlook for commodity prices, which were surprisingly buoyant in the final quarter of 2016.
"While higher prices may linger they have been supported by temporary supply shortages, stimulus aimed at China's construction sector and an unusually high level of investor speculation – none of which will last forever," Mr Smith said. "The prices for many commodities have moved beyond the point where today's prices reflect the fundamentals of those commodities.
"The risks in China remain as relevant as ever," Mr Smith noted, pointing to the fact that demand may depend on how China deals with over-construction and speculation.
Tax cuts and infrastructure spending flagged by US President Donald Trump have already given the US dollar a lift, the report noted.
"That will add to the US trade deficit and see more manufacturing lost in the American rust belt," the quarterly report noted. "In turn, that may see the US opt for higher tariffs on China. This would be a significant change for the worse."
Additionally, the speculation of a rise in global inflation after his election may be premature.
"Global inflation will eventually lift," the Deloitte Access Economics report found. "In fact wages growth in the US – where the first signs of global inflation are likely to be found – is already starting to improve. But that is unlikely to make a significant impact before 2018."
The fall in resource-sector capital spending has hit Western Australia, Queensland and the Northern Territory and the rise in exports hasn't filled that gap, the report found, with economic growth now concentrated in NSW, Victoria and the ACT.
"Yet, having experienced a housing boom, NSW and Victoria are now faced with inflated housing values and a risk of apartment oversupply, while the stimulus from low interest and exchange rates may soon start to wear off," the report said. "This points to a possible narrowing of state outcomes from 2018 onwards as the northern and western states emerge from their downturn."
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