Australia’s received some major economic data yesterday with the release of construction spending figures for the June quarter, and it was stunningly strong.
According to the ABS, it surged by 9.3%, or $4.4 billion, to $51.67 billion in seasonally adjusted chain volume terms, breezing past expectations for a far smaller increase of 1%.
The percentage jump was the largest on record, while the increase in dollar terms was the second largest on record, only surpassed by a $4.5 billion surge in early 2012 at the peak of Australia’s mining infrastructure boom.
It was a truly amazing result, seemingly adding an enormous amount to Australian economic growth during the June quarter.
Financial markets certainly took that view, bidding up the Australian dollar and selling down Australian government bonds in the immediate aftermath of the release, seemingly positioning for a stonking increase in next week’s Q2 GDP release.
However, as the well-worn phrase goes, when it looks too good to be true it often is.
On a closer inspection of the construction report, it appears the lift in spending was not everything that it seems.
And, perhaps more importantly, it’s unlikely to lead to a huge increase in GDP.
Here’s a table from the ABS showing the breakdown of the June quarter construction work report.
As it shows, the lift in spending was driven by an enormous jump in the value of engineering work, which increased by 21.5%, or $4.37 billion, to $24.67 billion.
Of that $4.37 billion increase, $4 billion came from the private sector in Western Australia alone, likely reflecting the “completion” of a large LNG terminal in the state, according to Tapas Strickland, economist at the National Australia Bank.
“The surge in engineering construction was almost entirely driven by the central process facility (CPF) sailing into Australian waters at the end of May,” he said following the release of today’s report.
“Unusually the ABS did not record his capital import in its monthly merchandise trade numbers. We would correspondingly expect imports to be higher in the Balance of Payments (as part of the GDP report).”
So it was driven by a one-off factor, and will likely not impact GDP growth significantly as much of the value-add of the project was not delivered in Australia but rather in South Korea.
JP Morgan economist Tom Kennedy agrees with Strickland’s assessment, noting that today’s report is unlikely to have much impact on GDP.
“This increases the likelihood of a technical offsetting import adjustment, and also that today’s data are simply reflecting the ABS’ policy of marking the full value of such structures as ‘work done’ in one lump, when installation is completed,” he says.
“This brings about a degree of volatility in the construction work done series which will not be mirrored in the national accounts.”
Outside of the surge in engineering spend, the rest of the report was largely disappointing, especially when it came to residential construction spending, which fell by a further 0.4% to $17.53 billion, an outcome that almost certainly signals that we’ve now passed the peak in Australia’s residential building boom.
“Housing construction posted a disappointing 0.4% quarterly fall,” said Daniel Gradwell, senior economist at ANZ.
“While activity did rebound as expected in Queensland following the weather-affected March quarter, weakness across most other regions saw the overall result slip.
“This suggests that we have seen the peak level of housing construction, and are unlikely to see further growth from here.”
Like Strickland and Kennedy, he too thinks that today’s report is unlikely to meaningfully add to economic growth during the June quarter.
“Aside from the strength in engineering construction due to an LNG platform import that will not flow through to Q2 GDP, housing construction declined further, and private non-residential building was also disappointing,”he said.
“The public sector fared much better as expected, but the upshot of these results is that privately funded construction will not provide much, if any, support to Q2 GDP.”
With the construction report out of the way, market attention will now turn to the release of Australian private sector business capital expenditure figures on Thursday, another report that will go some way to determining how strong or weak next week’s GDP report will be.
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