Australia’s total construction drops sharply in Q3, likely to be large drag on Q3 GDP

Australia’s construction work done dropped severely again in the September quarter, with weakness widespread throughout residential building, engineering construction and non-residential building. Total construction dropped 4.9 percent, as compared with consensus expectations of a decline of 1.7 percent. This comes out to be 11 percent lower than one year ago.

On a GDP basis, the construction activity is estimated to have negatively contributed 0.7 percentage points in the third quarter, following a subtraction of 0.2 percentage points in the second quarter, said ANZ in a research report. This might be the largest subtraction since the GST-related collapse in housing construction in 2000.

The declines were widespread with unexpected softness recorded in residential construction. Adjusting for the underreporting of renovations to existing homes, private residential construction is estimated to have dropped 2.5 percent in the third quarter after a 3.7 percent rise in the prior quarter, stated ANZ. The decline in housing construction is quite unexpected, given the continuous strength seen in building permits and a record backlog of work in the pipeline. Given this, residential construction is likely to rebound in the quarters ahead before decelerating later in 2017.

Elsewhere, the degree of the weakness in non-residential building was slightly unexpected. Private non-residential building dropped sharply 13 percent in the third quarter, in spite of a strong rebound in the value of building approvals recently. Non-residential activity is expected to rebound in quarters ahead given the improved pipeline of work, according to ANZ.

Meanwhile, private engineering construction dropped 6.6 percent in the third quarter after a 16 percent decline in the second quarter. It is down 36 percent year-on-year. This huge decline shows the unwinding of the record boom in mining investment. Public construction stayed broadly flat in the September quarter, with growth in engineering construction countered by softness in non-residential and residential building.

At 05:00 GMT, the FxWirePro's Hourly Strength Index of Australian dollar was highly bullish at 146.985, while the FxWirePro's Hourly Strength Index of USD was neutral at -1.39567. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex