Engineering construction work hits 2½-year high

Renovations hit 4-year high; Credit card lending falls
Engineering construction; Private sector credit; Building Approvals; China data

Engineering construction work done rose by 5.5 per cent – the biggest lift in 2½ years – in real (inflation-adjusted) terms in the June quarter to $22.1 billion. Work done is up 4.4 per cent on a year ago – the strongest growth rate in over two years. The value of engineering work yet to be done stands at $69.4 billion in the June quarter.

Lending: Private sector credit (effectively outstanding loans) was broadly unchanged in August (survey: -0.1 per cent) to be up 2.2 per cent on the year – the slowest annual growth rate in over 10 years. Personal credit fell by 1.1 per cent in August to be down 12.5 per cent on the year – the slowest rate in the 44-year history of the series.

Deposits & credit card lending: According to APRA, resident deposits held at Authorised Deposit-taking Institutions (ADIs) rose by $11.4 billion in August or 0.5 per cent. And loans to households via credit cards fell to a 13½-year low of $29.4 billion in August from $30.2 billion in July. Credit card lending is down by 22.7 per cent over the year.

Dwelling approvals: Council approvals to build new homes fell by 1.6 per cent in August (survey: flat) to 13,691 units, but are up 0.6 per cent from a year ago. And the value of approvals for alterations and additions climbed 7 per cent to 4-year highs of $784.3 million.

China data: China’s official purchasing managers’ manufacturing index rose from 51 to 51.5 in September (survey: 51.3). The services index lifted from 55.2 to 55.9 (survey: 54.7). But the private sector Caixin manufacturing index eased from 53.1 to 53 in September (survey: 53.1).

Private sector credit figures have implications for finance providers, retailers, and companies dependent on business spending. The approvals and engineering data have implications for banks, retailers, developers, building and building material companies. The Chinese data is important for exporters, especially rural producers, consumer goods, mining and energy companies.

What does it all mean?

• Infrastructure spending has become a feature of federal budgets in recent years. Prior to the pandemic, economic growth was sluggish and cash was splashed on ‘big ticket’ public transport-related projects in an attempt to boost public investment and create jobs for builders displaced by the residential construction slowdown.

• Tuesday’s October 6 budget will be no exception with nation-building projects likely to cornerstone Australia’s economic recovery. Already engineering construction work done has lifted by 5.5 per cent – the most in 2½ years – in the June quarter. It is a strong outcome given that Australia was in virus lockdown in April with building activity heavily impacted by government restrictions.

• And the infrastructure pipeline is still-healthy. Of work to be done, a still-healthy $17 billion of projects are to be completed in NSW – the most of any state or territory. Victorian work to be done stands at $16 billion. And Queensland work to be done is at $12.2 billion in the June quarter.

• Deputy Prime Minister and Minister for Infrastructure Michael McCormack has said that water-related infrastructure is a priority, on top of the 70 major projects that received around $40 billion of federal government funding last year.

• Of course, in the lead up to the budget the usual calls for the $130 billion high-speed rail – connecting Brisbane to Melbourne and East Coast regions – have been listed as a “priority.” With the pandemic changing the way we work and live – with less use of public transport (for now) – the government is presented with an opportunity to ‘dig’ Australia out of the economic hole.

• Council approvals to build new homes surged 33.8 per cent in Western Australia in August, supported by the state government’s Building Bonus scheme. And the federal government’s $688 million HomeBuilder scheme is supporting detached building approvals, according to the Housing Industry Association.

• With Aussies stuck at home during the pandemic, hardware stores are getting a workout with home renovating keeping homeowners and tradies busy. And the pipeline of ‘reno’ work is gushing with the value of council approvals for alterations and additions climbing to 4-year highs of $784.3 million.

What do the figures show?

Engineering work – June quarter

• Engineering construction work done rose by 5.5 per cent – the biggest lift in 2½ years – in real (inflation-adjusted) terms in the June quarter. Work done is up 4.4 per cent on a year ago – the strongest growth rate in over two years.

• The value of work done for the private sector rose by 8.4 per cent to be up 4.7 per cent from the year before – also the strongest annual growth rate in over two years.

• The value of work done for the public sector rose by 1.3 per cent in the June quarter to be up by 3.8 per cent from a year ago.

• Engineering construction work rose in six of the states and territories in the June quarter: NSW (up by 14 per cent); Victoria (up by 1.7 per cent); Queensland (up by 0.6 per cent); South Australia (up by 6.5 per cent); Western Australia (up by 11.5 per cent); Tasmania (down by 16 per cent); Northern Territory (up by 56.4 per cent); ACT (down by 1.9 per cent).

• In the year to June, engineering construction work fell in six of the states and territories: NSW (down by 13.5 per cent); Victoria (up by 8.4 per cent); Queensland (down by 5.8 per cent); South Australia (down by 18.9 per cent); Western Australia (up by 18.2 per cent); Tasmania (down by 0.7 per cent); Northern Territory (down by 46.5 per cent); ACT (down by 19.7 per cent).

• The value of engineering work yet to be done rose fell from 5-year highs of $76.8 billion in the March quarter to $69.4 billion in the June quarter.

• The value of outstanding non-resource projects fell from record highs of $50.7 billion in the March quarter to $45.5 billion in the June quarter.

Private sector credit – August

• Private sector credit (effectively outstanding loans) was broadly unchanged in August (survey: -0.1 per cent) to be up 2.2 per cent on the year – the slowest annual growth rate in over 10 years.

• Housing credit grew by 0.2 per cent in August to be up 3.2 per cent on the year.

• Owner-occupier housing credit rose by 0.4 per cent to stand 5.4 per cent higher over the year.

• Investor housing finance was broadly unchanged, but was 0.6 per cent lower than a year ago.

• Personal credit fell by 1.1 per cent in August to be down 12.5 per cent on the year – the slowest growth rate in the 44-year history of the series.

• Business credit fell by 0.4 per cent in August, but was still up 2.9 per cent on the year.

• The M3 money aggregate lifted by 0.9 per cent to be up 11.6 per cent from a year ago – the strongest annual growth rate in 11 years.

• Broad Money rose by 0.8 per cent in August to be up 11.5 per cent on the year – the highest growth in 11½ years.

• Loans and advances by banks grew by 2.4 per cent in the year to August – the slowest growth since records began in the 44-year history of the series.

• According to APRA, resident deposits held at Authorised Deposit-taking Institutions (ADIs) rose by $11.4 billion in August or 0.5 per cent. Deposits from financial institutions fell by $1.2 billion with deposits by companies up $3 billion, household deposits were up $9.1 billion and government deposits lifted $0.5 billion.

• Loans to households via credit cards fell to 13½-year lows of $29.4 billion in August from $30.2 billion in July. Credit card lending is down by 22.7 per cent over the year to August.

Building Approvals – August

• Council approvals to build new homes fell by 1.6 per cent in August (survey: flat) to 13,691 units, but are up 0.6 per cent from a year ago.

• House approvals rose 4.6 per cent after lifting 8.1 per cent in the previous month.

• Apartment approvals fell 12.9 per cent in August after rising 20.3 per cent in July.

• Over the past year 173,110 new homes were approved, down 3.4 per cent on a year ago.

• Dwelling approvals across states/territories in August: NSW (-14.2 per cent); Victoria (+1.8 per cent); Queensland (+8.1 per cent); South Australia (-4.8 per cent); Western Australia (+33.8 per cent); Tasmania (-26.2 per cent). In original terms, Northern Territory (+22.6 per cent); ACT (-32 per cent).

• Dwelling approvals across states/territories over the year to August: NSW (-18.8 per cent); Victoria (+22.7 per cent); Queensland (+12 per cent); South Australia (-9.5 per cent); Western Australia (-20.6 per cent); Tasmania (-10.6 per cent). In original terms, Northern Territory (-22.5 per cent); ACT (+38.7 per cent).

• The value of all commercial and residential building approvals rose 18.1 per cent in August. Residential approvals rose by 4.4 per cent with new building up 4 per cent and alterations & additions 7 per cent higher. And commercial building rose 40.7 per cent after falling 18.8 per cent in July.

• Over the year to August, building approvals totalled $114.8 billion, 12.1 per cent above the decade average.

What is the importance of the economic data?

• The ABS releases detailed data on engineering construction work each quarter. The data provides insights into activity for building and construction companies, civil engineering businesses, building material suppliers and associated businesses.

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

• The Bureau of Statistics’ (ABS) monthly Building Approvals release contains figures on local council approvals to build residential structures such as homes and units as well as commercial premises such as offices and shops. Approval is one of the first stages of the construction ‘pipeline’ and is thus a key leading indicator of future activity. An increase in approvals would point to stronger future activity for r construction-related companies.

• China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.

What are the implications for investors

• With the coronavirus recession and related COVID-19 government restrictions contributing to the loss of 11,200 construction jobs in the three months to August (source: Bureau of Statistics), ‘shovel-ready’ and ‘fast-approved’ projects should be up first on the infrastructure agenda.

• A major government investment (in partnership with state and territory governments) in social housing, hospitals and public school upgrades (yes, our kids are still learning in demountable buildings!) should be first up on the agenda. Next, city-regional rail corridors (i.e. NSW Central Coast to Sydney) need to be upgraded, boosting connectivity, productivity and reducing commuter times.

• And a focus on modernising Australia’s electricity grids (complemented by spending on renewable energy) and water infrastructure – ensuring the supply of essential and affordable services – should be given ‘tier-1’ status by policymakers. Infrastructure Australia has also identified 155 projects with $64 billion on its priority list, including an upgrade of deep-water freight ports, the Australian Institute of Sport’s facilities in Canberra and the $1.8 billion Western Sydney M12 motorway.

• While government payments, super withdrawals and mortgage relief have helped support and boost the incomes of households during the pandemic, Aussies remain cautious about taking on more debt. In fact, lending for credit cards hit 13½-year lows in August and the annual growth rate of personal credit remains stuck at 44-year lows.

Published by Ryan Felsman, Senior Economist, CommSec