Australian construction spending comes up short, and appears unlikely to boost Q1 GDP

Steve Christo/Corbis via Getty ImagesCBD and South East Light Rail construction continues on George street closing it to general traffic.
  • The value of Australian construction work in the March quarter rose by 0.2%, missing forecasts for a larger increase of 1.3%.
  • The value of engineering and residential construction rose, offsetting a decline in non-residential work.
  • Economists don’t believe the report has any major implications for Australian Q1 GDP.

The value of Australian construction activity rose fractionally in the March quarter as firmer engineering and residential work was offset by weakness in non-residential building.

According to the Australian Bureau of Statistics (ABS), the value of construction rose by 0.2% to $51.211 billion in seasonally adjusted chain volume terms, undershooting forecasts for a larger increase of 1.3%.

Over the year, the total value of construction increased by 5%.

Stronger engineering construction drove most of that gain, lifting by 1.5% to $23 billion in the March quarter, leaving the increase on a year earlier at 10.3%.

“Much of this is being driven by the public sector, up 3.1% over the quarter to a record quarter high of $9.3 billion,” said Belinda Allen, senior economist at the Commonwealth Bank.

“Much of the large transport infrastructure projects underway and in the pipeline are through both the Federal and States governments.”

In comparison, private-sector engineering work rose by a more modest 0.4% during the quarter.

The value of residential construction also inched higher during the quarter, increasing 0.4% to $18.05 billion. From a year earlier, that was still down 1.3%, reflecting previous declines in Australian building approvals.

Non-residential construction was the one weak spot during the quarter with the value of work falling 2.6% to $10.15 billion. However, that was still up 5.4% on the same quarter in 2017, again, an outcome reflecting recent strength in non-residential building approvals.

“Building approvals related to tourism, entertainment and recreation facilities continue to rise,” Allen said.

This has been supported by the Asian income story.

“However, there have been falls in approvals for office and retail and wholesale buildings after strong growth through much of 2017.”

Combined, the total value of building work in the March quarter fell by 0.7% to $28.2 billion. Over the year, it increased by 1%.

“Residential construction has remained at an elevated level to date although some falls are expected over the remainder of the year, while non-residential construction has retreated from recent highs,” Allen said.

Despite the softer-than-expected headline figure, Tom Kennedy, economist at JP Morgan, said the report has few implications for Australian Q1 GDP, released in early June.

“Today’s data does not affect our tracking estimate of GDP which remains strong at 0.8% for the quarter,” he said.

“From a real GDP perspective, the release is most useful in forecasting dwelling investment and engineering activity, with the performance of these inputs having a net neutral impact on our real GDP tracking framework.

“Non-residential building work, the main drag today, has maintained only a very loose correlation with the national accounts definition of building/investment, so we are cautious in mapping the weakness into the growth numbers.

“Instead, we await next week’s private CAPEX report which historically has offered a much more accurate depiction of underlying investment activity.”

The ABS will release Australia’s Q1 private sector capital expenditure report on Thursday, May 31.

Further GDP inputs will be released in early June ahead of the actual national accounts on Wednesday, June 6.

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