Continuing variability is the key theme of the latest Construction Market Reports by the Australian Construction Industry Forum (ACIF), as the industry re-establishes a ‘new normal’ after significant national and international shifts.
Total construction activity is projected to amount to around $228 billion in 2014-15, slightly down on the 2013-14 estimate of $237 billion. There are winners and losers in those big numbers, both by region and type of work.
The reports show that the outlook is being buffeted and bolstered by alternating economic headwinds and tailwinds. Growth in construction in sectors such as mining and heavy industry engineering is now falling as the surge in global demand for Australia’s resources takes a pause.
Meanwhile, key domestic markets are heating up. Growth in states such as New South Wales is picking up while growth in states such as Western Australia and Victoria is decelerating. It is vital to keep an eye on the different factors driving the big picture in construction in 2014.
Released in May 2014, the reports show reduced projected expenditures for engineering construction with marginal growth in residential and non-residential building.
The projected decline in engineering construction activity is largely driven by a moderation in mining activity and falls in investment in supporting infrastructure. Compared to the November 2013 forecast, the expenditure curve for engineering construction shows a faster decline down to approximately $100 billion per annum by 2019-20. The projections reflect a recovery in the very long run reflecting fundamental factors particularly the underlying demand for minerals and energy resources.
Non-residential expenditure is expected to show modest growth in the short to medium term, with spending in health and aged care, accommodation and entertainment driving much of its growth.
Expenditure in residential building is projected to increase, supported by demand created through population growth and low interest rates. This upward trend is expected to moderate and flatten out in the medium term reflecting cyclical factors and the inevitable adjustment in interest rates above their historically low rates.
State by state
Australian Capital Territory - The economic outlook for the Australian Capital Territory (ACT) is likely to be significantly impacted by the job cuts in the Australian public service. The Federal Government has flagged intentions to reduce the public service workforce by up to 14,000 people, with some reports suggesting that over 5,000 of this to come from the nation’s capital.
Lower employment in the ACT would impact personal consumption levels and put additional downward pressure on housing demand, reversing previous strong growth.
New South Wales - The outlook for New South Wales’ economy is positive, with output growth projected to lead the rest of Australia as the booming states of Western Australia and Queensland feel the impact of a decelerating mining sector over the coming decade.
After years of sluggish performance, the residential building sector is expected to see significant improvements, driven largely by relatively low interest rates and existing pent-up demand for new houses and multi-unit dwellings. There is also a healthy pipeline of engineering construction projects in mining, rail and roads that are already committed or on their way.
Overall, ACIF projects New South Wales to be one of the leading states in construction activity in the coming decade.
Northern Territory - The Northern Territory’s economy had a strong performance in 2012-13, with gross state product growing by 5.5 per cent, the second highest of all states after Western Australia. This was driven by an investment boom in mining projects, and associated infrastructure and residential building projects.
The population growth rate in the Northern Territory has trailed those of the other mining states and the national average. However, this is expected to pick up slightly over the next several years, while the unemployment rate is expected to remain below the Australian average. Major projects such as the Ichthys LNG development project will continue to drive growth in the Northern Territory’s economy for the foreseeable future.
Queensland – Queensland’s economy has been booming over the past decade, fuelled by the surge in mining activity. Large-scale investments in mining associated infrastructure have meant that engineering construction expenditure has grown at a speed, and to amounts, at unprecedented levels.
ACIF projects the peak in construction spending to be reached this year, in 2013-14. As construction of many of the mega projects come to completion in the medium to long term, the state’s income is set to continue on an upward trajectory, resulting from the increased capacity to export coal and gas to international markets.
South Australia - High exchange rates and labour costs have had an adverse impact on South Australia’s manufacturing sector. Real gross state product (GSP) grew by 1.3 per cent in 2012-13, which was a minor fall from the 1.8 per cent growth recorded in the previous year.
Performance in construction activity is projected to have mixed results. The beneficial impacts of historically low interest rates will support some activity while the state continues to adjust to structural change.
Tasmania - The Tasmanian economy had a subdued performance in 2012-13, with the slightly positive growth recorded in the last six months not enough to reverse the negative impact of the first half of the year, and gross state product falling by 0.1 per cent. Unemployment has risen sharply to the highest in the nation, while population growth has been the lowest of all states and territories. Positive economic indicators include international exports growth of 13.5 per cent in 2012-13 compared to seven per cent nationally.
Economic growth in Tasmania is expected to remain flat for the next two to three years, and be below the national rate for the foreseeable future, leading to moderate construction activity forecasts. A lower Australian dollar may allow for continued growth in exports and reduce pressure on the Tasmanian manufacturing, forestry, farming and tourism sectors, while continued low interest rates may encourage additional investment over time.
Victoria - Construction activity was negative in Victoria in 2012-13 despite strong growth in the residential building sector. A larger contraction is projected for 2013-14 at approximately minus 1.5 per cent, driven largely by the projected reduction in residential building activity.
While there is a lot of attention on negative outlook for manufacturing in the state, the key driver for construction has been population growth and lower interest rates. However, these are unlikely to be insufficient to ward-off the contraction in residential activity foreshadowed for 2013-14.
Western Australia - ACIF projects spending in engineering construction to peak in 2014-15, followed by a gradual decline as major resource projects come to an end. Although spending will fall quickly at first, the downward trend will likely flatten out at levels well above the historical average.
Non-residential building activity has grown strongly as support services demand grew with the rise of mining townships and rapid population growth. We anticipate these activities to slow down and trend at close to zero growth through to 2022-23.