Australian construction slumps again, adding to downside risks for Q1 GDP

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  • The value of Australian construction work fell for a third consecutive quarter in early 2019.
  • The weakness was broad-based, reflecting declines from the private and public sectors and across all categories except for non-residential work.
  • Coupled with a shock decline in real retail sales in the March quarter, the construction report points to early downside risks for Q1 GDP.

The value of construction work undertaken in Australia during the March quarter fell unexpectedly, creating early downside risks for Q1 GDP following a shock decline in real retail spending in early 2019.

According to the Australian Bureau of Statistics (ABS), the value of construction work fell by 1.9% to $50.78 billion in seasonally-adjusted chain volume terms, undershooting the flat outcome expected by financial markets.

The decline followed a 2.1% drop in the December quarter that was smaller than the initial 3.1% fall reported. Construction work also declined in the September quarter of last year.

From a year earlier, the value of construction fell by 6%.

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The quarterly decline was driven by weakness in all categories except for non-residential work. The value of public sector construction slumped 3.7%, nearly three-times faster than the 1.3% drop in the private sector.

Building construction slipped by 0.4% to $29.84 billion, leaving it down 1% over the year.

Reflecting the steep decline in Australian building approvals over the past two years, the value of residential work slumped 2.5% to $18.73 billion, a result partially offset by a 3.6% lift in non-residential building work to $11.1 billion.

Kaixin Owyong, market economist at the National Australia Bank, said the drop in residential work largely reflected weakness in apartment construction from the private sector.

“The 2.4% fall in private residential building work in Q1 was driven by apartments, which fell 4.3% in the quarter,” he said.

“Work done on the construction of houses declined slightly by 0.3%.

Compared to the March quarter 2018, the value of residential work slipped 3.2% while non-residential construction increased by 3.1%.

Rounding off the weak construction update, engineering work slumped by 3.9% to $20.95 billion, leaving it down a substantial 12.4% from a year earlier.

While there were some pockets of strength in the March quarter, ANZ said the result will drag on Q1 GDP.

“The weakness in residential activity was not a surprise, but public engineering construction contracted for the third consecutive quarter, which is surprising given the large pipeline of public infrastructure spending,” said Catherine Birch, economist at ANZ.

“Consequently, construction activity will continue to detract from GDP growth.”

Ben Jarman, economist at J.P. Morgan, said the early partial indicators for Q1 GDP suggests the slowdown in the economy in the second half of last year was “real”.

“It is early on in the Q1 GDP accounting but the numbers so far suggest the loss of momentum was real, with stabilisation of the annual rate of growth around 2% all that is likely to be achieved in the March quarter,” he said.

“This is clearly below potential [where growth is sufficient to keep unemployment and inflation stable], and softness in domestic demand in particular is likely to bias the unemployment rate a bit higher from here.”

J.P. Morgan is forecasting quarterly GDP growth of 0.6% in the March quarter, down from 0.7% prior to the release of the construction report.

Australia’s Q1 GDP report will be released on June 5.

Ahead of that date, a large number of partial indicators, such as net exports, business inventories and private sector capital investment, will help solidify expectations for how the economy fared in early 2019.

The largest component in GDP — household spending which accounts for just under 60% of the economy — won’t be known until the national accounts are released. In the March quarter, retail sales volumes declined marginally, pointing to broader downside risks for household spending.

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