Business investment is set to fall sharply over the next two years as the economic downturn bites, with a number of major infrastructure projects already shelved.

Independent forecaster Access Economics says new projects have failed to fill the vacuum left by those being completed.

The value of total investment projects was $607.2 billion in the December quarter, a 5.8 per cent decline from the previous three months.

“A downturn in investment had certainly been on the cards … the rate of business investment relative to output had moved to an unusually high level,” Access director David Rumbens said in the forecaster’s latest Investment Monitor report.

“A number of major projects have been shelved over the past few months. The result is likely to be a sharp fall in business investment over the next two years.”

Shelved projects include Shell and Anglo American’s $5 billion coal-to-liquids project in the Latrobe Valley and BHP Billiton’s decision to delay its $6.3 billion Olympic Dam expansion until 2010.

However, Mr Rumbens expected engineering work to hold up over the next six months.

Access expects governments will keep investing and may even ramp up their investment spending, although this will not fully offset the slide in business investment over the next two years.

“Provided that (government) projects selected pass the cost-benefit test and can be delivered fast enough to assist in defending against the downturn, then the timing is right to lift government spending on infrastructure,” Mr Rumbens said.

Construction costs would become more affordable as business investment slowed, although imported equipment costs would be more expensive due to a falling Australian dollar.

A more subdued investment environment would affect all states, but was likely to have a greater effect where resources investment had been the strongest - Western Australia and Queensland.

“Property investment in New South Wales and and Victoria may also be in for a lean time as the unemployment rate rises,” he said.

“New South Wales … is likely to lead the Australian economy into recession, leaving a very soft investment climate in the short term.”

AAP