A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK.
The saying “Never make predictions, especially about the future”, is attributed to individuals as varied as the physicist Niels Bohr and the baseball player Yogi Berra.
The world of economic forecasting is particularly perilous. That economists – this one included – failed to anticipate the global financial crisis or last year’s collapse in growth says it all. Yet some predictions can be made with a fairly high degree of confidence. One such prediction you hear today is that the West is heading for an infrastructure boom. Six factors suggest that this prediction really should materialise.
First, governments have put infrastructure spending at the heart of their efforts to kickstart the recovery. President Biden’s ‘American Jobs Plan’ involves spending $2.3tn over eight years, much of it on public transport, broadband, energy and EV charging stations. The EU’s €750bn ‘Recovery Plan’ will help fund the energy transition, digitisation and other infrastructure projects. In the UK the government is aiming to push investment spending back up to the sorts of rates last seen more than 40 years ago.
Second, borrowing costs for governments are at rock-bottom levels. The UK government can borrow for ten years at a rate of 0.9% a year; Germany pays -0.2% (In an inversion of the normal rules investors are paying the German government to lend it money). If inflation runs at 2.0% a year, in line with the UK and euro area inflation targets, the real cost of borrowing is negative. Governments can borrow for nothing to fund infrastructure. It ought not to be too difficult to find viable projects.
Third, much of the West’s infrastructure is creaking. Growth in public investment in the rich world is running at a fraction of the rates in the early 1960s. The value of the public capital stock has shrunk relative to the size of economies. Going through some US airports feels like a trip back to the 1960s. 43% of US roads are in “poor” or “mediocre” condition, according to American Society of Civil Engineers. In the UK leaky, often Victorian-era pipes lose 3bn litres of water a day. Even the widespread notion that German infrastructure is first-class is out of date. Last year the OECD branded Germany’s infrastructure investment as “insufficient” and lamented the backlog of repairs.
Fourth, reaching net-zero carbon emissions requires a new energy infrastructure. The shopping list includes renewable electricity generation and storage, smart grids, carbon capture and storage, hydrogen and EV charging infrastructure, energy efficiency and replacing gas boilers. The International Energy Agency estimates that by 2030 global investment in energy will need to more than double from 2.5% to 4.5% of world GDP.
Fifth, the growing number of disabling cyber-attacks, and the experience of the pandemic, has underscored the vital importance of resilient infrastructure. The FT reports that in the last three years US critical infrastructure have been hit by about 700 ransomware attacks. This year hackers have infiltrated the water supply of a city in Florida, disrupted operations at a San Diego hospital chain and caused widespread fuel shortages on the East Coast by attacking the Colonial’s fuel pipeline. Protecting against such attacks will require significant investment in digital infrastructure, especially in the critical energy, utilities and healthcare sectors.
Sixth and finally, private sector infrastructure spending is heading for a rebound after last year’s collapse. Much of the world’s infrastructure, including ports, airports, energy infrastructure and digital, is provided by the private sector, not the state (In the UK about half of all infrastructure is privately funded). With pandemic-related uncertainties starting to clear, and larger companies flush with cash, capital spending is due for a strong rebound. The UK outlook has been helped by the reduction of Brexit risk with the UK’s departure from the EU and by the introduction of the two year ‘super-deduction’ for capital spending in March’s budget (The FT reports that the super-deduction was one factor in BT’s decision to speed up the roll-out of fibre broadband).
Now if you’ve made it to the sixth point you may, like me, feel, that predictions of a surge in infrastructure spending are more in the realms of a near certainty than a forecast. Unfortunately, that would be overdoing it. In the case of infrastructure, it’s a case of, “there’s many a slip ‘twixt the cup and the lip”. Time and again promised infrastructure projects fail to materialise.
Cost overruns, public opposition, changing priorities and technical problems can put a spanner in the works of the grandest plans. Sometimes the money to deliver projects isn’t even there. Patricia Buckley, Deloitte’s managing director for economics in the US, and a former Department of Commerce official, told me, “All recent US Administrations have pushed for substantially more infrastructure spending, but none were able to solve the financing issues”. Nor has using private capital to fund public projects proved to be a silver bullet. There are record levels of private funding available for infrastructure projects, but investors prefer buying existing assets over the risks of building new ones. Levels of spending on public-private partnerships, once seen as the solution for unlocking spending, have fallen amid concern about costs and contract specification.
The lead times and costs of big projects can be eye-watering. Berlin’s recently opened Brandenburg airport was nearly a decade behind plan and three times over budget. London Crossrail, due to open this year, was originally proposed in 1974. In a damning assessment Professor Bent Flyvbjerg of Oxford’s Saïd Business School found that of 3,022 large scale projects only 0.2% were on budget, on time and delivered the planned benefits.
There are solutions. Rigorous initial scrutiny of projects and continued political oversight can help. Repairing and improving existing assets tends to provide a surer way of expanding capacity than building new. Distancing infrastructure from the electoral cycle through independent bodies, such as the UK’s National Infrastructure Commission, builds consensus. Granting long contracts to the private sector reduces uncertainty.
My guess is that, this time, the level of political commitment, the pressing need and the availability of capital mean that projects will get built. Few things in this life are certain. But it looks a fairly safe bet that we are heading for an infrastructure boom.
PS: In last week’s Briefing we highlighted the risks of rising inflation in western economies. Since then newly released data show that the UK inflation rate more than doubled between March and April to 1.5%, partly as a result of one-off factors. With signs of wage pressures emerging in some sectors and factory input prices rising at the fastest pace in more than four years inflation risks warrant close attention.
