Australia's prospects for economic growth just took a hit

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  • Weak construction activity looks set to weigh on Australian Q3 GDP.
  • The value of construction work undertaken last quarter fell by 2.8%, led by a steep drop in engineering construction.
  • The value of residential and non-residential construction also slipped.

The value of construction work in Australia fell in the September quarter, creating downside risks for the nation’s upcoming Q3 GDP report.

According to the Australian Bureau of Statistics (ABS), values fell by 2.8% to $53.144 billion in seasonally adjusted chain volume terms last quarter, disappointing markets who were looking for an increase of 0.9%.

From a year earlier, the value of work fell by 16.9%, largely reflecting a high base effect created by a large, one-off increase in the value of engineering work seen in the September quarter 2017, rather than an actual plunge in construction activity.

Commonwealth Bank

The ABS said the value of construction work fell across all categories last quarter, led by a 4.5% drop in engineering work to $23.028 billion.

In the public sector, the value of engineering slipped by 0.1% to $9.828 billion after rising strongly in the prior two quarters. In contrast, the value of private work tumbled by 7.5% to $13.2 billion.

“The fall in private sector engineering work is related to the winding down of mining investment,” said Kristina Clifton, Senior Economist at the Commonwealth Bank. “This process is close to completion.”

Over the year, the value of total engineering work in this category fell by 34.4%. In the public sector values lifted by 8.5%, down from 17.8% in the year to June. Private sector work plunged by 49.3% over the same period.

Despite the weakness seen last quarter, Clifton says there is reason for optimism about what may lie ahead.

“There are some positive signs for mining including a big lift in mineral exploration in Q2,” she said.

“All of the state governments have plans to lift infrastructure spending over the next few years, so public sector engineering activity should remain at a high level.”

Like engineering, building construction also slipped by 1.5% to $30.116 billion as the value of non-residential and residential work fell by 2.4% and 1% respectively to $10.486 billion and 19.63 billion.

Despite the quarterly decline, the total value of building work still increased by 4.3% over the year.

Residential construction rose by 5.4% over this period, larger than the 2.6% lift in the value of non-residential work.

Andrew Hanlan, Senior Economist at Westpac Bank, said the broad-based weakness points to downside risks for Australia’s Q3 GDP report released next week.

“The sharp fall in construction work will dent GDP growth. We are currently forecasting a quarterly increase of 0.7%,” he said.

“Risks to this number are now clearly to the downside.”

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