Construction Boom Won’t Save Australian Economy: BIS

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Wednesday, September 3rd, 2014
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The current boom in housing construction and a likely uptick in commercial building and infrastructure investment are unlikely to save the Australian economy from its weakest four year period of domestic activity since the 1990s recession, a new forecast says.

In its Long Term Forecast 2014-29 report, BIS Shrapnel acknowledges that along with exports, residential construction will be the standout contributor toward economic growth in Australia over coming years, while major projects in retail, warehouses and accommodation should offset declines following the current boom in hospital building and ensure that the commercial building sector posts modest growth.

The report notes, however, that with activity in other non-mining business sectors such as retail and manufacturing expected to remain soft as long as the dollar – which is expected to drop back to below $US0.80  over a 12 to 18-month timeframe – remains high, any broader recovery in the non-mining sector will be several years away while housing by itself will not be sufficient to make up for an anticipated 40 per cent pull back in resource construction over the next four years.

Accordingly, domestic demand will grow at just 1.5 per cent in 2014/15 and an average of just two per cent per annum over the four years to 2017/18, BIS says – the weakest result of any four year period since the 1990s recession.

In that time, the overall economy will grow well below trend rates (3.25 per cent) at just 2.5 per cent per annum, while employment growth (668,000 new jobs) will be similar to the last four years and not sufficient to bring the unemployment rate down.

“It will be a slow and difficult transition from an economy driven by the huge resources construction boom, which largely underwrote our solid economic performance over the last decade,” BIS Shrapnel senior economist Richard Robinson said.

“We are looking for the next growth drivers to come through and take over from mining investment. But we think the next set of drivers will be slow to come through. The rebalancing, the dismantling of the capacity to service high levels of minerals investment and redeploying resources to the non-mining sectors, and hence the reversing of high Australian dollar-induced structural change to more broadly-based growth, will take time.”

Australia economic growth

The report comes as the construction sector added a record $118.3 billion to the Australian economy in the year to March (most recent figures available) – up two per cent from the year before as resource work remained strong whilst still winding back and activity in the residential sector picked up.

Overall, the sector contributes 7.6 per cent of the value of gross value added (year to March) and accounts for almost nine per cent of the nation’s overall workforce.

While the next four years will be tough, however, BIS does suggest strength will return to the economy from 2018/19 as an anticipated lower dollar allows the nation to rebuild its industrial and services base. Another round of mining projects, further public investment and a renewed upturn in housing and non-dwelling building, meanwhile, all contribute to a stronger growth profile.

In that year, growth of 3.5 per cent is tipped, with momentum set to continue into early next decade.

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