Turf QLD Industry Alert |AiG BUILDING and CONSTRUCTION REPORT – FEB 27 2015

AiG BUILDING and CONSTRUCTION REPORT – FEB 27 2015

AUSTRALIAN ECONOMIC DEVELOPMENTS

Data released this week show that engineering and non-residential construction, particularly public sector construction, fell in the December quarter. More positively, residential construction powered ahead in the quarter, with apartment building especially strong in NSW and Victoria. Looking ahead, engineering investment will continue to be weak. The outlook for public sector projects is uncertain given recent election results in Queensland and Victoria, while NSW is forecast to have the bulk of major projects. On private sector business investment intentions, the outlook for spending over the next two years is weak, which adds weight to the case for another interest rate cut by the Reserve Bank of Australia (RBA). The ABS also released wage data this week. This recorded the slowest growth on record in wages, reflecting subdued business conditions and the soft labour market, adding further weight for another cut.

Building Boom in Residential Construction While Non-Residential Work Is Tepid

The ABS released several key releases on construction activity and business investment this week. The quarterly Construction Work Done release contains important measures of building activity, which will feed into the December quarter GDP figures due next week. Building work rose by 6.3% over the year to December in inflation-adjusted terms (Chart 1). This was largely due to very strong private sector residential work, which rose by 13.4% over the past year. However, non-residential building work has been relatively lacklustre, declining by 2.6% over the year to December, as public sector work has declined in real terms and private sector work has slowed to around 5% annual growth. Looking ahead, the RBA is concerned about the low levels of private sector non-residential approvals, which sit relatively low as a percentage of GDP (Chart 2). This is consistent with weak underlying conditions in the commercial property market, with the national CBD office vacancy rate at its highest level since 1997. Across the states, building activity has been particularly strong in NSW and Victoria over the past year (Chart 3). Victoria continues to have the largest volume of work with $64.8 billion of total work under way, of which 64% is associated with residential building, particularly new apartments, over the past year (including alterations and additions). The state saw building work increase by 7.8% over the past year. NSW recorded the fastest growth in building work of 12.5%, while South Australia recorded strong growth of 8.1%. Building growth in NSW also includes strong residential work, with apartment building lifting by 30% over the past year.

Mining Engineering Investment Slows Further but Manufacturing Lifts Spending

The ABS also released private capital expenditure (CAPEX) data for Q4 2014. This reports on the private sector engineering construction and machinery and equipment investment components of GDP.

Total private capital expenditure declined by 2.2% in December quarter, and was down by 3.6% over the year to December (all data are in seasonally-adjusted, inflation-adjusted terms). These data were slightly weaker than economists had forecast, but confirmed the ongoing trend of overall weak investment, as the decline in mining engineering investment is yet to be fully offset by other industries. Private sector investment in building and structures fell by 2.6% in the December quarter and was down 7.3% over the year, largely reflecting falling engineering construction related to new mines and related facilities. Machinery and equipment investment, which feeds into the quarterly GDP data, declined by 1.3% in the quarter, but has lifted by 4.7% over the past year. More positively, the manufacturing industry recorded a 4% lift in investment in the December quarter. This is likely to owe to the boost to confidence in the sector on the expectation of stronger export sales, given the recent depreciation in the dollar since September 2014, which is now down 15.6% against the $US and down 9.9% in Trade-Weighted Index terms since the start of September 2014. Investment by other selected industries (which accounts for 43% of all capex and includes construction and the larger private sector services sectors) strengthened by 1.4% in the December quarter, and is 17.2% stronger over the past year. As mentioned above, mining investment, which still accounts for 51.2% of all capital expenditure, was down by 5.7% in the December quarter and 16.3% over the past year.