Australian construction activity weakened by more than expected in the September quarter, mainly reflecting the impact of the shutdown in Victoria on non-residential construction work. Against weakness in private sector construction work, governments are starting to lift spending on public works providing stimulus to the economic recovery.
Construction Work Done — Q3 | By the numbers- Total construction work done (private and public sectors) declined by 2.6% in the September quarter to $51.179bn against the median estimate for a 2.0% contraction (Q2 was revised to +0.5% from -0.7%). The decline in annual terms steepened to -4.2% from -0.3% (revised from -2.2%).
- The headline results were;
- Engineering work -3.3%q/q to $22.21bn (4.0%Y/Y)
- Building work -2.0%q/q to $28.97bn (-7.2%Y/Y)
- Residential work -1.0% to $17.22bn (-8.9%Y/Y)
- Non-residential work -3.4%q/q to $11.75bn (-4.5%Y/Y)
Construction Work Done — Q3 | The details
Overall Australian construction activity was 2.6% lower in the September quarter weighed by weakness in work done by the private sector and by the impacts of the shutdown in Victoria. Whereas during the national shutdown in Q2 the construction sector in aggregate was less affected by the social distancing and mobility restrictions than many other industries, construction work in Victoria, notably in the non-residential segment, was directly impacted when the state went back into lockdown and this was reflected in the weaker-than-expected national result reported today for Q3. The impact of elevated uncertainty over the economic outlook was reflected by the decline in private sector activity as projects were shelved or delayed. Helping to moderate this was a pick-up in activity from the public sector as governments brought forward projects to provide stimulus to the recovery with the promise of much more to come.
In the private sector, total construction activity contracted by 4.4% in the quarter (-6.9%Y/Y) as the level at $38.12bn slid to its lowest since Q4 2010. Within this, non-residential (commercial) work weakened sharply (-6.4%q/q) mainly reflecting the impact of the shutdown in Victoria (-21.4%), as per the chart below.
Activity in private sector residential work declined by 1.2% in the quarter (-9.3%Y/Y), with only a modest fall coming through in Victoria (-0.5%q/q) that centered on unit construction (-2.0%q/q). New home building in Australia pulled back by a further 2.0% in Q3 — its 9th consecutive quarterly decline — to be 11.1% lower through the year. But alteration work (albeit coming off a 5% fall in Q2) rebounded by 4.6% as the Federal Government's HomeBuilder scheme that provides eligible recipients with grants of $25k to put towards substantial renovations quickly gained traction in the market.
There is currently a very uneven outlook for residential construction. The detached segment is being buoyed by stimulus measures from ultra-low rates as well as government incentives targeted mainly at first home buyers. However, the higher-density segment is coming up against headwinds from weak population growth dynamics due to the international border closures making developers reluctant to commit to new projects, while elevated vacancy rates in the capital city markets are weighing on investor sentiment. As these effects play out, the two lines in the chart below are likely to diverge further.
Public sector construction activity lifted by 3.2% in Q3 to $13.06bn to be 4.9% higher over the year. Building work led with a 4.6% rise (8.5%Y/Y), while a smaller increase of 2.7% came through in engineering work (3.5%Y/Y). The overall dynamic being that governments are looking to provide an offset to the weakness in the private sector by raising spending in public works providing stimulus to the economic recovery. The recent Federal Budget contained incentives for the states and territories to accelerate the rollout of infrastructure projects so the uptrend can be expected to steepen over the coming years.
Construction Work Done — Q3 | Insights
Today's report was a little weaker than expected — in part due to an upward revision to the June quarter data — as construction activity was weighed by the shutdown in Victoria. The disruptions were mainly associated with non-residential construction work due to limitations on the number of workers permitted on site and restrictions on mobility between sites. Residential activity was a little weaker in Q3 as a decline in new home building was moderated by a lift in alteration work due to the support of the HomeBuilder scheme, while there is a divergent outlook in place between the detached and higher-density segments over the near term. Meanwhile, the public sector is beginning to ramp up infrastructure spending to provide support to the economic recovery.