Non-residential construction could be the next big boom for Australia's economy

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Most analysts agree Australia’s apartment-building boom has peaked, and along with it the stable contribution to growth from residential construction.

However, Australia is still well-placed to benefit from additional growth in non-residential construction and infrastructure spending, according to Commonwealth Bank senior economist Katrina Clifton.

Clifton said the positive impact will more than offset any falls in growth and employment stemming from a slowdown in residential building activity.

Source: CBA

“On a net basis the construction rotation will add around 62,500 new jobs over 2017/18 and 2018/19. This includes jobs in the construction sector as well as employment in other areas of the economy which results from flow-on spending,” Clifton said.

To arrive at their estimates, Clifton and her team used input/output tables prepared by the Australian Bureau of Statistics.

The tables help quantify the impact on growth and employment as demand rises in a particular sector. CBA then used multipliers to calculate the positive flow-on effect to other industries.

“For example, the flow-on effects of an increase in residential construction include increased demand for furnishings and fittings. And increased demand for these goods lifts employment in the retail sector,” Clifton said.

Based on those calculations, CBA said increased home renovations, non-residential construction and infrastructure spending will positively impact growth over the next two financial years, despite the fall in residential construction.

Source: CBA

“We estimate that the construction rotation will add 1.0ppts to growth in 2017/18 and lift employment by 58,700,” Clifton said.

“We estimate a smaller 0.2% contribution to growth in 2018/19 and 3,800 additional jobs. This is because we expect a smaller increase in non-residential construction and infrastructure spending and a larger decline in residential construction activity.”

Adding to the bank’s optimistic outlook, Clifton is hopeful the transition to non-residential and infrastructure spending will help contribute to a a long-overdue pickup in wage growth.

Clifton added that although residential construction has peaked, the downturn is likely to be “gradual and fairly shallow”.

That’s a view that would appear to be supported by last week’s building data from the ABS, which showed October approvals rose by 0.9% in seasonally adjusted terms against a forecast decline of 1%. The result marked the fourth increase in the last five months.

Clifton cited strong population growth and low interest rates as two factors that would be supportive of residential constructions.

She added that the latest construction cycle included more approvals for multi-units than previous cycles, which typically take longer to build.

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