Australian construction activity came in at the bottom end of the range of market estimates rising by 0.8% for the June quarter. The surprise was that the upturn in the residential construction cycle cooled in Q2 as both new home building and alterations declined. Headwinds related to the pandemic continued to weigh on non-residential construction. This weakness was offset by rising activity by the public sector with state and territory governments bringing projects forward to provide stimulus to the recovery.
Construction Work Done — Q2 | By the numbers
- Construction work done (across the private and public sectors) was 0.8% higher in the June quarter at $52.9bn against the median estimate for a 2.8% rise. Activity in Q1 lifted by 2.4%. Growth through the year firmed from -0.3% to 0.4%.
- Engineering work +1.8%q/q to $22.3bn (-2.7%Y/Y)
- Building work +0.1%q/q to $30.6bn (+2.8%Y/Y), which includes;
- Residential work -0.1% to $19.0bn (+8.9%Y/Y)
- Non-residential work +0.3%q/q to $11.5bn (-6.0%Y/Y)
Construction Work Done — Q2 | The details
In a much weaker-than-expected outturn, construction activity across the economy was 0.8% higher for the June quarter, coming in at the bottom of the range of market forecasts for today's report. Construction work had lifted sharply in the first quarter (2.4%), supported by a surge in activity in residential construction in response to policy stimulus and state and territory governments turning the key on projects to provide support to their local economic recoveries. In the June quarter, the former surprisingly lost momentum but the latter accelerated. This comes ahead of the material disruptions in the current quarter. Unlike earlier lockdowns, the current restrictions have more directly hit the construction sector, most notably in New South Wales and Victoria.
Private sector construction activity stalled in Q2 (0.0%) following its strong rise in the March quarter (2.7%). Engineering work firmed by 0.5% in the June quarter to consolidate its increase from Q1 (2.1%) but momentum in building work slipped to -0.2%q/q from 2.9% in the previous quarter. Driving the slowdown was residential construction as work in the segment declined by 0.2% after growth of 5.9% and 3.1% in the previous two quarters, supported by the HomeBuilder grants scheme, first home buyer incentives and rising housing prices. Both new home building (-0.1%) and alterations (-0.6%) weakened in Q2.
We know from other data that the surge in demand for residential construction following the stimulus measures has led to supply constraints — higher materials and labour costs are indications of that — and that may have weighed on output. But while alterations have surged to record highs new home building (and residential work overall) is only back at around pre-pandemic levels.
Work in the private non-residential segment remained weak (-0.4%q/q, -12.0%Y/Y) matching the approvals data. The headwinds associated with the pandemic have weakened demand for areas such as office and retail construction.
In the public sector, construction activity advanced by 3.2% for the quarter after rising by 1.6%, though this was downwardly revised from 4.3% and probably boosted the former. But the key point is that momentum in public work is strengthening, rising by almost 5% over the past two quarters. Building work is driving the progress, up 9.5% over this period, compared to a 2.8% lift from engineering. This might suggest that smaller projects that can more quickly be rolled out by state and territory governments are occurring, though many states are committed to significant infrastructure projects.
Construction Work Done — Q2 | Insights
A weaker-than-expected result for construction activity leads to what is shaping up to have been a fairly modest quarter of economic growth in Q2. The detail in residential construction was the surprise, with supply constraints perhaps explaining some of the weakness due to the very strong take-up of the stimulus measures. Disruptions in construction are likely to have been material in Q3 due to the pandemic restrictions. Beyond the short term issues, the residential cycle should resume its upturn, while public sector work will also support the economy.
