Australian construction activity was weaker than expected in the December quarter as supply constraints remain a headwind, holding back the pace at which the sector can work through elevated pipelines. Cost pressures continue to remain high but are trending lower.
Construction Work Done — Q4 | By the numbers
- Construction activity declined by 0.4% in the December quarter, a downside surprise on market expectations for a 1.5% rise. Work done in Q3 was revised to show a larger rise of 3.7% from 2.2% in the initial report. In year-ended terms, construction work advanced by a modest 1%.
- Segment details were;
- Engineering work expanded by 1%q/q (from 4.7% in Q3) to 4.3%Y/Y
- Building work declined by 1.6% (following a 3% rise) to be down by 1.4% through the year.
- Residential work lifted by 0.9% (from a 2.1% rise in Q3) but still contracted by 1.8% over the year.
- Non-residential work pulled back sharply by 5.1% in the quarter, which saw annual growth fall from 7% to -0.8%.
Construction Work Done — Q4 | The details
Construction activity appeared to stall in the December quarter (-0.4%) following a strong September quarter (3.7%) in which adverse weather and supply-related disruptions eased. This left activity 3.3% higher over the back half of the year, a strong rebound from a 2.2% contraction in the first half.
In the most recent quarter, the weakness was driven by non-residential construction (-5.1%), with broadly offsetting gains coming through in the residential segment (0.9%) and in engineering work (1%).
Looking more closely into the details, there were positive developments in private sector home building, with activity expanded by a further 2% after a 3.4% rise in Q3. This effectively reversed the contraction in work done over the first half of the year (-5.5%) when the sector was severely hampered by an extended La Nina event, shortages of labour and materials and rising cost pressures. Meanwhile, alteration work (-5.1%q/q) continues to unwind as more of the renovations undertaken in response to the HomeBuilder stimulus are completed.
Engineering work was a positive overall (1%), though there was a divergence between activity in the public (3.5%) and private sector (-0.8%). The former is being supported by a large pipeline of infrastructure projects across the nation, with many state governments ramping up investment as a stimulus response coming out of the pandemic.
The main area of weakness was private sector non-residential construction, which slumped by 7.5% in the quarter, its largest fall since 2016. However, this was after a surge in activity in the previous quarter (5.6%). Overall, work in the segment fell in both the first (-0.7%) and second half (-2.3%) of 2022, suggesting that capacity constraints remain a headwind.
Construction Work Done — Q4 | Insights
Supply constraints that have affected the construction sector look to have eased from the first half of the year but still remain a headwind. Inflation in the sector remains elevated but has likely peaked given the downward trend observable in the quarterly rate (see chart below). Based on today's report, residential construction looks likely to have relatively neutral implications for Q4 GDP growth, though non-residential construction will be a clear negative.
