Australia’s total construction falls again in Q1, remains a drag on GDP

Australia’s total construction work fell again in the first quarter of 2016 due to further weakness in engineering construction and sharp decline in non-residential building. It continues to weigh on GDP. Total construction in Q1 declined 2.6%, as compared with consensus expectations of a decline of 1.5%. This is the ninth decline in the last 10 quarters. On an annual basis, construction is down 7%, signifying that construction will negatively contribute 0.4 percentage points to Q1 GDP.

Housing construction continues to grow; however, it is closing to a wider peak. Meanwhile, residential investment grew 1% in Q1 2016. Both renovations of existing homes and construction of new homes recorded growth. In spite of a slowdown of housing market in recent months, the work done is supported by a record volume of work in the pipeline, said ANZ in a research report. Even if the backlog of work might underpin additional growth in the activity, the housing construction is not expected to contribute meaningfully to the GDP this year, according to ANZ.

Private engineering construction declined sharply, indicating the current contraction in the resources sector. In the first quarter, engineering construction declined 7% and dropped 21% y/y. The multi-billion dollar LNG projects are nearing completion. This is leaving a considerable void in engineering activity. Construction is likely to experience major declines in the quarters to come, added ANZ. Meanwhile, private non-residential building recorded the sharpest decline since 2009. Construction of that sector declined 8%, reflecting prior weakness in permits. This suggests that non-mining business investment’s construction component continues to be weak.

Meanwhile, public construction grew largely. It was up 2.5%, helped by broad-based strength in spending. Engineering construction continues growing, consistent with the view that infrastructure work will significantly contribute to growth, according to ANZ.