Why an infrastructure boost makes economic sense

The UK would derive more benefit from investing in infrastructure than any other major world economy.

In recent weeks I’ve explained why, in a few years’ time, Britain’s lights could go out – literally.

I’ve also spotlighted how spending on other parts of our key national fabric has also been grossly inadequate.

Today I explain why this is an ideal time for many governments, especially ours, to invest in improved infrastructure.

Despite all the efforts of policy makers since the 2008/09 financial crisis, the global economy has remained very sluggish.

The outlook isn’t too bright either. I believe that governments, backed by their central bankers, will do everything they can to stave off any possible return to recession.

Falling bond yields mean that it’s cheaper for governments to borrow than at any time in history.

QE – quantitative easing, otherwise known as debt monetisation – may not have generated either the economic growth or the consumer price inflation it was intended to create. In fact, it’s maybe making matters worse.

Yet QE and lower bond yields have given the politicians another shot in the locker that they didn’t have before the global debt monetisation scheme started.

Government borrowing is much easier

Governments can now happily ratchet up their borrowings in the knowledge that their countries’ central banks will, in effect, pick up the tab. Politicians can now spend lots of other people’s money while smiling at TV cameras and telling the electorate that they’re doing something worthwhile.

You could argue that this is a bit like giving a gorilla a machine gun. Handing our elected representatives an open chequebook could be dangerous.

But we don’t make the rules. We just try to interpret what they’ll mean for your portfolio. And there’s no doubt that a major dose of public infrastructure spending is needed, with the private sector also playing a big part.

Indeed, both the International Monetary Fund (IMF) and Standard & Poor’s have agreed that there are huge concerns about the condition of global infrastructure and that the investment spending should start now.

As I’ve noted before, Standard and Poor’s has said that the UK would derive more economic benefit from increased public spending on infrastructure than would any other major world economy with the exception of Brazil.

Standard and Poor’s has noted that developing economies were generally more likely to be boosted by the ‘multiplier effect’ (how much an increase in infrastructure spending creates a corresponding climb in GDP).

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Britain’s £60bn investment gap

But the global ratings agency has calculated the gap between infrastructure investment needed in the UK and what’s been actually spent at more than £60bn. So the boost to Britain of an infrastructure spending rise equal to 1% of GDP would be 2.5 times as much as the cost of that investment over a three-year period. Put another way, it would be double the effect of a similar increase in Germany or France.

“This is not exactly a badge of honour: the one thing we have been consistently good at over the last 50 or so years in the UK is our consistent and woeful under-investment in infrastructure,” says infrastructure expert Chris Hallam of law firm Pinsent Masons. “This is something the industry has long been championing and which the government now seems to have fully taken on board.”

“The big question is where the investment is going to come from? China might well be UK infrastructure’s ‘white knight’ – it has the funds to invest, it needs to invest those funds and it needs to find new markets/sources of work for its gargantuan construction companies. The UK is a highly attractive infrastructure investment market for China – this opportunity has to be grabbed with both hands”.

Recent research by Pinsent Masons has concluded that the UK could attract up to £105bn in Chinese investment into infrastructure projects by 2025. “If we are to benefit fully from the potential scale of Chinese investment, politicians across all parties need to find solutions and need to hold their nerve and hold firm on the promises made with regard to infrastructure spending,“ says Chris Hallam.

Will the companies doing all the infrastructure work make good profits from it? To finish, here’s some more good news on that score.

Construction companies will thrive

Tender prices – what construction companies can charge for their efforts – are expected to rise by around 25% over the next five years, says the Building Cost Information Service (BCIS).

The BCIS reckons that tender prices will rise a little faster than costs over the first two years of the forecast period before moving in line with costs over the next two years and then moving ahead of costs again later.

In simple terms, this means the profit margins made by the companies that will be re-constructing the UK are set to widen.

Add this upbeat outlook to anticipated strong increases in work volumes/new orders and the outlook for Britain’s building industry is looking progressively brighter and brighter.

Right now I’m working on a report that provides details on some great investment opportunities in the infrastructure sector.

More to follow…

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