The value of Australian construction work plunged late last year -- but it's not bad news for the economy

Photo: Natalia Kolesnikova/ AFP / Getty Images
  • The value of construction work done plunged in the final quarter of 2017
  • After spiking a quarter earlier, the value of engineering work tumbled by over 35%
  • Despite the huge decline, it’s unlikely to have much of an impact on Australian economic growth, according to the CBA

Australia received some pretty ugly data on the value of construction activity in the December quarter today.

According to the Australian Bureau of Statistics (ABS), it slumped by 19.4% to $50.32 billion during the quarter in seasonally adjusted terms, led by a spectacular plunge in the value of engineering work which fell 35.4% to $22.197 billion after surging a quarter earlier.

The spike and subsequent plunge in the value of engineering construction is seen in the chart below from the Commonwealth Bank.

Source: CBA

The value of residential work also slipped by 1.2% to $17.8 billion, offsetting a 4.0% increase in non-residential construction which rose to $10.22 billion.

Over the year, the total value of work still rose by 4.6%, helped by strong performances from engineering and non-residential construction.

However, the headline quarterly result was pretty dire, especially as parts of the report feed directly into Australia’s Q4 GDP figure that will be released early next month.

So will the collapse in engineering construction lead to an equally GDP result?

No, says John Peters, Senior Economist at the Commonwealth Bank.

He explains:

Very large expenditures on the imported Floating LNG platforms (FLNG) for Prelude and (Inpex) Ichthys drove the large rise in Construction Work Done (CWD) in Q3, which then dropped out of the numbers equation in Q4. This dynamic pretty much explains Q4’s sharp decline in CWD. This was reflected in the engineering component in which the LNG platform is counted which jumped by 34% in Q3 and then shrank by 35.4% in Q4.

From a GDP perspective, the import of the LNG platform in Q3 was a big negative for net exports and it neutralised the large positive impact on GDP emanating from the jump in engineering work done in Q3.

Conversely Q4’s dive in construction work done as the LNG platform dropped out of the numbers will have negative impact on Q4 GDP via the private investment component. But this will be offset by a better net exports component of GDP as the importation of the LNG platform disappears.

Put simply, Australia imported some massive LNG platforms in the September quarter last year, leading to a surge in engineering “construction work” that was offset by a spike in import volumes.

Now that will be reversed in the December quarter, meaning the net impact on economic growth will likely be negligible.

Peters certainly thinks so, forecasting that Q4 GDP will grow by around 0.6%.

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