The value of Australian construction work surged last quarter -- but there's a catch

A LNG tanker at Karratha, Western Australia. Image: Woodside.

Australian construction activity boomed in the September quarter, driven by a sharp increase in the value of engineering work.

According to the Australian Bureau of Statistics (ABS), the total value of construction work surged by 15.7% to $61.863 billion in seasonally adjusted chain volume terms, breezing past expectations for a decline of 2.3%.

It was the largest quarterly total on record, surpassing the final quarter of 2012 during the peak of Australia’s mining infrastructure boom.

Within that headline total, the value of engineering work jumped by a massive 33% to $34.241 billion, leaving the increase on a year earlier at 68.4%.

Truly enormous — the largest total since the June quarter of 2014.

However, while an incredibly bullish result, it likely reflects the importation of LNG platforms during the quarter, something that is considered new construction despite being built overseas.

“This is an implausibly large increase and is unlikely to represent genuine real domestic value add,” said Tom Kennedy, Economist at JP Morgan.

“Instead, we suspect today’s outperformance reflects the ABS’ policy of marking the full value of mining related structures as ‘work done’ in one lump when installation is completed, rather than incrementally over time.

“Anecdotal reports suggest the catalyst behind the 3Q surge was the importation and installation of a large LNG platform in Western Australia.”

Adding credence to this view, the value of engineering work in Western Australia surged 90% from the June quarter.

So while the increase looks spectacular, the reality is that it wasn’t.

The value of private sector engineering construction jumped by 46.4% to $25.17 billion. Reflective of stronger levels of public infrastructure investment, public engineering work rose by 6.1% to $9.071 billion, the highest level on record.

Despite the strength in engineering, the value of construction in other areas went backwards over the quarter.

The ABS said the value of residential work done fell by 0.3% to $18.102 billion, leaving the decline on a year earlier at 1.7%.

Non-residential construction also slipped, falling by 0.6% to $9.519 billion. Despite the quarterly wobble, the value of work still rose by 7.9% from the September quarter of 2016.

Combined, the total value of building work fell by 0.4% to $27.622 billion, leaving it up 1.4% on a year earlier.

Despite the surge in the total value of construction work done, Kennedy says it will not flow through to an equally large increase in Australia’s Q3 GDP report released in early December.

“The surge in engineering work evident in today’s [report] will not be mirrored in the upcoming Q3 real GDP release,” he says.

“Residential investment was a touch weaker than expected, printing flat between Q2 and Q3, though not sufficiently so to influence our forecast for Q3 GDP which remains at 0.75% quarter-on-quarter.”

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