Australian construction activity contracted by 0.3% in Q3, surprising to the upside on much more pessimistic expectations that were factoring in a larger hit from the Delta lockdowns. The temporary suspension of construction work in Sydney led to a large fall in the volume of work completed in NSW, though there was an offsetting rise in work done across the rest of the nation. Supply constraints continued to hold back activity in the residential sector.
Construction Work Done — Q3 | By the numbers
- Construction work done was down 0.3% on the quarter to $53.9bn (chain volume estimate) against the market consensus for a significantly larger fall of -3%, to be 3.5% higher through the year. Activity in Q2 was revised materially higher to 2.2% from 0.8%.
- Across the categories;
- Engineering work +0.4%q/q to $23.5bn (+4.0%Y/Y)
- Building work -0.9%q/q to $30.4bn (+3.2%Y/Y), which includes;
- Residential work 0.0% to $18.8bn (+7.0%Y/Y)
- Non-residential work -2.2%q/q to $11.7bn (-2.4%Y/Y)
Construction Work Done — Q3 | The details
The fall in Australian construction activity in Q3 was much more modest than anticipated. Work done was down by 0.3% in the quarter whereas the median estimate was for a 3% fall due to the disruptions to construction work during the winter lockdowns. The temporary shutdown of the construction sector in greater Sydney certainly had a material impact as the volume of work completed in NSW fell by 8.1% in the quarter, though outside of WA (-3.2%) there were broadly offsetting gains posted by the other states. This was led by Victoria (5.8%) with the statewide shutdown of the sector appearing to have occured too late in the quarter to be a factor in Q3's numbers. Meanwhile, work done in South Australia slowed to a 0.4% rise in Q3 after expanding by 21% through the first half. This may have been accentuated by the temporary suspension of construction work during the state's short lockdown.
At the national level, the 0.3% fall in quarterly activity centred on weakness in building work (-0.9%). This was driven by a large decline in public sector building (-9.7%) reflecting the disruptions in NSW. On the back of this, public sector work was down 2.7% overall in Q3. Private sector activity mostly offset this with a 0.5% rise in the quarter, with building (0.5%) and engineering work (0.4%) up by similar magnitudes.
In the private sector, residential construction work was flat for the second consecutive quarter. The raft of stimulus measures to support housing construction led to a 7% surge in activity from the lows in 2020 during the period between Q3 last year and Q1 2021. However, the upswing has subsequently run into headwinds from the Delta lockdowns and capacity constraints as labour and materials have come in short supply, in turn driving up prices for builders.
On these effects, new home building posted its first quarterly fall in a year, down 0.8% in Q3. However, this was offset by the reacceleration in alteration work as the pipeline of renovations attracting the HomeBuilder grants was being worked through. Alterations were up 6%q/q after a weak Q2 (-3.3%).
The COVID recession led to a protracted slowdown in private non-residential construction, only hitting the low point in Q1 of this year as firms either pushed back projects or cut them altogether. The cycle is starting to turn, albeit from a low base. Work done in this segment was up 1.4%q/q after rising by 1.7% in Q2. This emerging upswing is something to watch closely in 2022. Business surveys generally convey confidence and optimism going into next year and if the economy rebounds from the Delta disruptions as expected, the conditions may be right for business investment to help sustain the broader expansion as the effects of stimulus fades. More insights on this will come to hand in tomorrow's ABS quarterly capex survey.
While activity from the public sector was weak in Q3 (-2.7%), there is a significant pipeline of major road and rail projects to come through over the coming years. Infrastructure development has been a key focus in many state government budgets since the pandemic.
Construction Work Done — Q3 | Insights
Overall, the impact of the winter lockdowns on construction activity looks to have been less severe than would be factored in to most estimates of quarterly GDP. That said, those forecasts are also reflecting the construction shutdown in Victoria, which is a drag that today's report does not reflect. In the residential sector, the data indicates that the reported labour and materials shortages are a material constraint on output. The pace at which the now very elevated pipeline of work can be worked through in 2022 seems to largely hinge on how quickly these constraints can be alleviated. Meanwhile, the non-residential construction cycle is starting to turn and business investment could become a key factor in sustaining the economic expansion. Public sector investment remains supportive for the medium to long-term outlook.