Construction Work Done — Q4 | By the numbers
- Total construction activity (including the private and public sectors) fell by 3.0% in the December quarter to $49.773bn; much sharper than the 1.0% contraction expected. Activity in Q3 was revised up by the ABS in today's report to show a modest 0.4% rise from the -0.4% decline reported initially. Construction activity showed a steeper decline through the year from -5.6% to -7.4%.
- The headline results were;
- Residential work -4.6%q/q to $17.486bn (-12.8%Y/Y)
- Non-residential work -3.4%q/q to $11.451bn (+3.3%Y/Y)
- Engineering work -1.5%q/q to $20.836bn (-8.0%Y/Y)
Construction Work Done — Q4 | The details
Australia's construction cycle remains mired in a sharp downturn with overall activity now having contracted in 5 of the past 6 quarters. This has has been driven by a rollover in residential construction work, residual weakness as remaining large-scale projects in the LNG sector completed and a slowdown in public works.
Private sector construction activity showed renewed weakness in Q4 with a 4.2% fall to $37.674bn, driving the decline in annual terms from -5.0% to -9.7%. Engineering work pulled back for a 4th consecutive quarter with a 3.1% fall to $12.152bn (-13.3%yr), with tomorrow's capital expenditure data to provide further insight here. Building work fell by 4.6% in the quarter to $25.522bn to be contracting at its fastest pace in annual terms (-7.9%yr) in the post-GFC period.
Within this, the residential construction cycle saw accelerated weakness in Q4 with activity falling by 4.6%; its sharpest quarterly fall since mid 2003, to be down by 12.6% over the year. This downturn is the deepest the sector has experienced since the early part of this century following the introduction of the GST. New home building contracted by 5.1% in the quarter (-13.5%yr), while alterations were down by a more modest 1.2% in Q4 (-5.6%yr).
Non-residential (commercial) building followed its volatile profile from the past few quarters in falling by 4.7% to $8.216bn, though this was after a 7.8% rise in Q3. Activity in this category is positive through the year (3.3%) and reflects strength in approvals from earlier in 2019.
The public sector is providing some offset to weakness in the private sector, with activity lifting modestly in Q4 by 0.7% to $12.1bn as annual growth came back into expansion (+0.5%) for the first time in more than a year. Engineering (infrastructure) work drove this outcome rising by 1.0% in the quarter to $8.683bn (0.7%yr) and building work was flat in Q4 at $3.415bn (-0.1%yr). Overall, public works appears to be regaining momentum after coming through a slowdown between the second half of 2018 and the first half in 2019, and with an elevated pipeline of projects to be completed, it should remain supportive for the growth outlook.
From a state perspective, the table (below) provides the breakdown for total construction work done in Q4 and over the year. In New South Wales, the construction cycle has been heavily impacted by the rollover in the residential sector, though strength in commercial work has proved some offset, while engineering work has been weak over the past year or so. It has also been a weak picture in Victoria, albeit not to the same extent as its northern counterpart. Residential weakness has weighed heavily on the construction sector in Queensland and Western Australia, with the full impact from the unwind in mining investment also being felt by these states, though commercial work has at least picked up. Following strength in 2018, both South Australia and Tasmania were mired in weakness by the end of 2019.
Construction Work Done — Q4 | Insights
This was a much weaker-than-anticipated outcome and next week's national accounts are likely to show that construction activity weighed notably on GDP growth in Q4, led by the residential sector. There is a possibility that Q4's weakness has been accentuated by the summer bushfires and related smoke haze, with the ABS reporting some minor disruption to its data collection in New South Wales, Victoria and the Australian Capital Territory, but this is coming amidst a downturn in the construction cycle in any case. The contrast between private sector construction activity (-4.2%qtr, -9.7%yr) and the public sector (0.7%qtr, 0.5%yr) remains consistent with one of the key dynamics over the past year or so in the Australian economy, whereby private demand conditions have been weak at a time when growth in public demand has been expanding at a robust pace. A strong pipeline of public infrastructure work is likely to see this continue. The recent upswing in house prices and improving momentum in dwelling approvals will likely result in the downturn in the residential construction cycle ending by around Q3 or Q4, but not before subtracting further from GDP growth through the first half of 2020.