The value of Australia’s construction sector slumped for the second consecutive quarter in late 2018 following larger than expected falls for residential and engineering work. The 3.1% decline in the fourth quarter was considerably lower than the 0.4% gain that had been forecast.
The new data published by the Australian Bureau of Statistics (ABS) adds further weight to the theory that downside risks to the country’s gross domestic product (GDP) are growing. While the engineering sector has been struggling for some time, the sharp decline in construction was not expected and suggests major challenges lie ahead.
The Q4 drop in the value of construction work follows on from the 3.6% fall for the third quarter. For the full calendar year in 2018, the value of work amounted to $51.6 billion, which is 2% down on the figure from 2017. ANZ economist Felicity Emmett said the sector has played a pivotal role in buffeting the economy in the 2010s but it now appears to be dragging growth lower.
She added: ‘While there is still a considerable amount of work in the pipeline for public engineering construction and residential construction, the weakness in [the second half of] 2018 has been more marked than we expected, and … this points to an earlier and sharper turn in the cycle than we expected.’
There were falls for nearly every category and state during the final three months of last year. Housing construction (-3.6%), engineering construction (-5%) and the private sector (-2.2) all went into negative territory in Q4, but the largest decline was in public construction, where value dropped 6%.
There were also significant falls in the states of Queensland (-5.8%) and New South Wales (-4.1%), the latter of which is considered a powerhouse in the sector. Both NSW and Victoria saw their first quarterly declines since 2014.
National Australia Bank Markets Economist, Kaixin Owyong also noted that the 3.7% decline in the value of private residential work is likely to have a negative impact on wider economic growth for the quarter to December. He said the Reserve Bank had proffered a more ‘modest’ 0.9% decline for the period.
The latest setback for construction has prompted market economists to double down on their own predictions that fourth-quarter GDP will undershoot the RBA’s economic forecast of 0.6% growth for Q4. UBS has already downgraded its forecast to 0.3% ahead of the release of the official report on Wednesday, March 6.
For construction, the outlook is gloomy after the RBA acknowledged that there has been a sharper decline in building than expected and there are likely to be concerns that work done on infrastructure plummeted 10% in the final quarter, despite the recent flurry of multi-year road and rail projects given the green light by state government.
‘Possibly bottlenecks are a constraint or it may have been weather disruptions,’ Westpac senior economist, Andrew Hanlan said. ‘Given the sizeable amount of work yet to be done and with new projects being added to the investment pipeline, we still expect public works to add to activity in 2019.’
HIA senior economist Geordan Murray said on Wednesday that there is clear evidence that housing finance, new home lots and building approvals all deteriorated in H2 2018. He said this indicates a ‘thinning out’ of the pipeline for new residential builds and that newer projects will become rarer after the completion of current construction.
The slowdown has also had an impact on the labor market, where jobs in the sector fell 1.6% for the three-month period to November according to recent ABS data.