Build me up

This week we take a closer look at the outlook for the New Zealand construction sector. A strong outlook for nationwide construction spending underpins our expectations for robust GDP growth over 2015 and 2016. However, further ahead, slowing construction sector activity is a key reason why we anticipate a downturn in GDP growth.

The strong outlook for construction activity over the next few years is a result of several significant work streams. The first is the continuing reconstruction work that is occurring in Canterbury. As discussed in our recent Bulletin ‘Focus on the Canterbury Rebuild,’1 reconstruction in Canterbury will be our nation’s largest ever construction project. We estimate that there will be around $35bn (in 2012 dollars) of reconstruction work. This is lower than the Government’s estimated $40bn spend. This is because since plans for the rebuild were developed a few years back, there have been significant cost increases that will make some planned construction uneconomic. Nevertheless, we still expect that a substantial amount of reconstruction work will occur, equivalent to around 17% of annual national GDP.

While there have been delays, reconstruction spending is now well advanced. Over the past year the amount of building work put in place in Canterbury was more than double its pre-earthquake pace. Looking forward, we expect that construction activity in the region will remain strong for some time. Increasing numbers of projects are moving into planning and building phases, and the rebuild is expected to have a ‘long tail’ related to non-residential projects.

The strength of construction activity in Canterbury means that we are fast approaching the peak in the rebuild. At its current pace, around half of planned reconstruction spending will have been completed within the next two years, after which time there will naturally be a tapering off in demand. We expect residential reconstruction work will peak through mid-2015 (consistent with the recent pull back in residential consent issuance), with total reconstruction activity peaking in early-2016.