MNI:RBA Ellis: Public Infrastructure Good New Engine of Growth

By Sophia Rodrigues

     SYDNEY (MNI) - Public infrastructure is the newest engine of growth for the

Australian economy and has the potential to be a better growth driver than

housing construction because of stronger spillover effects, Reserve Bank of

Australia Assistant Governor Luci Ellis said Wednesday.

     Ellis made the comments at the Stan Kelly Lecture in Melbourne, where she

spoke on the topic "Where Is The Growth Going To Come From?"

     "Like high-density residential construction, infrastructure projects serve

as a good replacement for mining investment projects in a 'growth handover',"

Ellis said. "The human skills needed for both types of work are very similar.

And spillovers to the rest of the economy [from infrastructure] are probably

even stronger than for housing."

     In the Statement on Monetary Policy published last Friday, the RBA said a

key upside risk to its forecast is that non-mining investment will pick up by

more than forecast, and one such source of upside risk could be an increase in

investment by the private sector in delivering public projects.

     Overall, the RBA appears to be relying on upside risks from infrastructure

spending to offset the downside risks from wage growth remaining subdued for

longer than it anticipates.

     In the speech, Ellis noted that the inventory of public works in the

pipeline is now much larger than usual. It will not only directly add to growth,

depending on how quickly the projects are completed, but will also have indirect

effects on the economy, as private firms do much of the work and increase their

investment to support the public contracts.

     Ellis also noted that transport infrastructure projects are a larger share

of public works which provides a positive boost to productivity in the economy

more broadly.

     However, Ellis also issued a note of caution on the outlook: the tendency

of these new engines of growth is to build more than required and they can't

grow indefinitely.

     "You can produce above-average amounts of these things for a while, but you

can end up with an excess you don't really need if the boom continues for too

long."

     "This is the problem with any kind of construction-related boom. The

stock-flow dynamics really matter. None of these sectors should be thought of as

sustaining growth indefinitely," she said.

     Ellis also talked about residential construction which has been the first

engine of growth since the economy began rebalancing away from the resources

boom.

     But housing construction doesn't add much to growth and at the peak only

added 0.5 percentage point to annual GDP compared with one or two percentage

points contributed by the mining investment boom in 2011 and 2012, she said.

     Current housing construction remains at a high level and is growing faster

than would be needed to house the growing population but it is no longer adding

materially to growth, she said. Overall, the housing construction sector can't

drive the entire economic rebalancing even after taking into account related

spending on furnishing and household equipment, Ellis said.

     In the longer run, growth will come from population growth, rising labor

participation and increases in productivity and innovation, Ellis said.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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