Construction activity in the Australian economy has fallen to its lowest level in nearly six years, extending the run of weak partial data for September quarter GDP in two week’s time.
Figures from the Bureau of Statistics yesterday showed the volume of construction work in the September quarter fell 4.9% from the June quarter, its largest drop in about 16 years, and was down 11.1% seasonally adjusted (down 3.1% quarter on quarter and an annual 10% in trend terms) from the third quarter of 2015.
That is the steepest quarterly drop in 16 years, when the introduction of the GST on July 1, 2000 triggered a slump in the September quarter of the same year.
The value of construction work done, a key component of GDP reading, contracted to a seasonally-adjusted $A46.76 billion in the three months to September 30.
That was down from a revised 3.1% drop (previously a 3.7% fall) in the June quarter.
As the market had been looking for a fall of just 1.6%, so that was a big miss.
While the weakness was seen in residential building and engineering construction (down 23% over the past year both in trend and seasonally adjusted terms), which includes mines, bridges etc, the weakest sector was non-residential building, where the volume of work dropped by 10.9% quarter on quarter, or 31% in trend terms.
The contraction in residential building contraction was in private new building (down 3.2% over the quarter) and alterations and additions ( down 0.7%).
"The latter declines run against the trend of swelling pipelines of work yet to be done in higher density dwelling construction," says JPMorgan economist Tom Kennedy. "We would therefore expect this to be a temporary lull from a pocket of the economy that should be delivering an ongoing positive contribution to GDP growth into 2017-18 (though adding to disinflation in rents)."
The weak overall result was led by another slump in WA, where construction work slumped 14% over the quarter and is now down 43% from a year ago, but Victoria also saw a fall in seasonally adjusted terms – down 7%, while there was a 2% dip in NSW.
The soft numbers add to the sense from the retail volumes and trade data (and business surveys) that GDP growth slowed in the third quarter.
“With the construction sector accounting for around 14 per cent of the economy this is a material headwind," Westpac economist Andrew Hanlan said yesterday.
He estimates that the drop in construction work will shave half a percentage point from September quarter economic growth, which will be reported in the national accounts on December 7.
"This outcome adds to evidence that the economy hit a soft spot in the middle of 2016, as suggested by soggy labour market conditions," Mr Hanlan said.
The question is whether the mid year rebound in building approvals and housing finance triggers an upturn in residential construction next year, or whether the growing warnings of an apartment overhang from next year onwards in Sydney, Brisbane and Melbourne sees a pull back by developers.
Economists say like the investment figures, the last couple of quarters has seen the slide in construction work done bottom out, with a modest upturn happening in 2017.
