Australian construction work declines in Q3

In a soft lead towards next week's National Accounts, construction data for the September quarter was much weaker than anticipated. The Construction Work Done data feed into estimates for private sector investment in residential and non-residential construction for GDP purposes. 

Construction Work Done — Q3 | By the numbers 

• The total value of construction work done in Q3 fell by 2.8% to $53.144bn, which was a vast disappointment on the market expectation for a 0.9% increase. Work done in Q2 was revised up to show an increase of 1.8%, compared to the initial estimate of 1.6%.  

• Private sector construction work fell by 3.4% in the quarter to $40.231bn, down by 22.9% on the year (prior: +1.6%q/q and -3.5%Y/Y)

•  Public sector construction work also fell by 1% in Q3 to $12.912bn for an annual gain of 9.4% (prior: +2.6%q/q and +17.5%Y/Y)  

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Construction Work Done — Q3 | The details 

Looking at the private sector where the value of work done in the quarter fell by 3.4% ($40.231bn), engineering was the predominant drag with a 7.5% fall to $13.2bn (-49.3%Y/Y). That analysis reflects volatility within the engineering component that has been heightened in recent quarters due to the import of infrastructure assets for the LNG sector.

Building work — including residential and non-residential work — was soft in the quarter falling by 1.3% to $27.032bn (+3.5%Y/Y). This was the sharpest quarterly contraction since Q3 2016. 

For residential work, the decline was 0.9% in the quarter coming in at $19.398bn (+5.7%Y/Y). This was entirely attributable to a weak quarter for 'new' home building, which fell by 1.6% to $17.164bn. The value of alterations to existing homes posted a rise of 4.5% to $2.234bn (+9.8%Y/Y).

Non-residential work, which relates to commercial projects such as offices and warehouses, was also soft declining by 2.2% in Q3 to $7.633bn (-1.6%Y/Y). 

   

In the public sector, it was a similar outcome of broad-based weakness. Total construction work done fell by 1% to $12.192bn, with a decline in building work (housing and non-residential construction) which fell by 3.6% to $3.084bn, while engineering work — relating to government investment in infrastructure projects — was little changed (-0.1%q/q) at $9.828bn.

The state-based details on a combined private-public sector breakdown are provided in the table below. The weakness in residential construction was a trend experienced across most states in the quarter. The detail for non-residential construction was mixed in Q3. Investment in government infrastructure assets, particularly in ongoing transport-related projects, lifted further in New South Wales and Victoria in the quarter with those states needing to accommodate strong rates of growth in their populations.

  

Construction Work Done — Q3 | Insights  

These data will have key implications for next week's Q3 GDP growth figures, with the broad-based weakness pointing towards soft to negative contributions from housing construction, private sector business-related construction and also government investment. This tilts the risks to the downside for growth in the domestic economy in Q3, though there are several key inputs yet to be released.

More broadly, the construction work data are volatile from quarter to quarter and can be heavily impacted by factors such as adverse weather conditions. While Q3's data are weaker than expected, Q2's outcome came in much stronger than expected by the market (at +1.6% vs +0.8%) and this was revised higher in today's release (to 1.8%).

For housing construction, activity is elevated but is likely to be around its peak for the current cycle. A strong pipeline of work is supportive, but working in the other direction are weakening approvals, tighter financing conditions, and declining property prices. Meanwhile, investment in public infrastructure assets by state governments has much further to run.