Australia: Construction weighs on Q2 GDP - ANZ

Research Team at ANZ, notes that Australia’s construction work done fell sharply in Q2, led by a steep fall in mining-related engineering construction, where we think that the economy is experiencing the maximum drag from the unwinding of the record boom in resource-sector investment.

Key Quotes

“Residential investment posted another solid gain, but the weakness in engineering means that construction will subtract an estimated 0.5pp from Q2 GDP.

Total construction fell sharply in Q2, subtracting 0.5pp from Q2 GDP. Construction declined by 3.7%, which was the largest fall since Q3 2015, to be 11% lower than a year ago. On a GDP basis, we estimate that construction subtracted 0.5pp from Q2 GDP after taking 0.1pp off in Q1. This is the largest subtraction since Q3 2014.

A very large fall in engineering construction drove the fall in total construction. Private engineering construction fell by 14% in Q2, which was the largest fall since the early 1980s recession. Construction has fallen at a double-digit rate in three of the past four quarters, such that it is now 36% lower than a year ago. This large fall reflects the unwinding of the record boom in mining investment, where we estimate that the maximum drag on GDP is under way and that most of the adjustment will be over by mid-next year.

Residential construction rose solidly in Q2. Adjusting for the underreporting of renovations to existing homes, we estimate that total construction rose by 2% in Q2 after a 2.4% gain in Q1. Construction is up 8% over the past year and we expect activity to be supported over the rest of 2016 by a very high level of building approvals and a record backlog of work remaining. Our expectation is that the contribution to GDP growth from residential investment will ease as the backlog is used up.

Non-residential building was little changed in Q2. Construction fell by 0.5% in Q2, with New South Wales taking a breather after a run of solid results. Activity is now 3% lower than a year earlier and non-residential building approvals suggest that construction will remain weak.

Public construction posted its strongest growth in five years. Total construction rose by 5% in Q2, although note that these data do not feed into GDP (public demand is sourced from the government financial statistics report). Growth was broadly-based, with housing, non-residential, and engineering construction all posting solid increases.”