Infrastructure investment needed
Written on the 17 April 2009
WHEN he heard Queensland’s AAA credit rating was downgraded BIS Shrapnel’s Dr Frank Gelber dismissed its relevance, because the most important action needed by governments now is to boost confidence through infrastructure investment.
Chief economist Gelber says most of Australia’s economic downturn has been a result of precautionary saving out of fear, which will flow on to declines in private investment this year. Government investment is needed to help fill this gap.
“When I heard Queensland’s AAA rating go down I thought, look stuff them (S & P) – they have not the foggiest idea of what they’re talking about anyway. This is the right thing to do,” says Gelber.
“The most important thing they can do is spend on infrastructure projects – that will make this place a better, more effective place to live and work in the future.”
He points out that while private investment is strong now, as the current round of projects comes to completion the next round will be ‘slaughtered’. And despite extraordinarily strong mineral investment in the last quarter, over the next 2.5 years the number of mining projects is expected to fall by around 50 per cent.
He says while certain sectors will find it difficult to avoid recession, in others the downturn is mainly driven by fear.
“We’ve got a major credit squeeze and a number of other things and most of what’s happened so far is us shooting ourselves in the foot,” he says.
“They’ve gone from pure greed which caused the problem, to pure fear which makes it worse.”
Australia is doing well in comparison to the economic ‘disaster areas’ overseas and Gelber praises the Reserve Bank for nipping the housing boom in the bud at a time when the US did nothing to stop it.
And even though foreign investors have pulled out cash from Australian sharemarkets to ‘save the farm’ back home, as Australia rides out the next couple of years the Aussie should settle at around US$0.75 as money comes back into the country.
Gelber advises that to complement a recovery, governments in Australia need to hold their nerves and make sure there are enough projects in the pipeline to moderate the extent of the downturn, and they can do so at a lower price now because construction costs are coming down as well.
He says as far as the private sector is concerned, the extent of the problem will be deepened by further falls in spending due to increased job insecurity if firms aggressively cut back staff.
“Unfortunately confidence is a fickle thing so we can’t say exactly how it will turn out,” he says.