The record long and strong new home building boom ended in 2016, and we are now a year into what we expect will be a three-year contraction.
Incidentally, this home building boom was vital to the economy’s continued expansion throughout the bust phase of the mining boom.
It is now public sector infrastructure investment where momentum is gathering. The timing is serendipitous given the state of play in both the mining and home building sectors.
Amidst this change, many if not most domestic macroeconomic fundamentals are remaining insistently the same. Economic growth remains well off the three per cent per annum sweet spot and the labour market continues to be somewhat conflicted (while growth in aggregate employment continues to gather momentum, growth in wages remains persistently low). These ultimately have been keeping inflation at the bottom end of or just below the RBA’s two to three per cent per annum target band. Moreover, this general dynamic has been in play (and frustrating policy makers) throughout most of the current post-GFC era.
Persistently low inflation underscored by weak wages growth has not only pervaded the domestic economy post GFC, but is a global phenomenon among advanced economies.
In the US, underlying annual inflation is below the two per cent target (in September, annual inflation outstripped two per cent largely due to a cyclone Harvey-related increase in fuel prices).
Across the Atlantic, however, the situation is somewhat mixed. In the Eurozone, economic growth continues to gather momentum but the labour market is yet to catch up, leaving general inflation also below the ECB’s near-two per cent target. The UK is something of an outlier. Annual inflation in September came in at three per cent, outstripping their central bank’s two per cent target. Indeed, the Bank of England has for the first time in 10 years raised official interest rates. However, Brexit is a key factor in the UK’s inflation situation – the associated depreciation in the value of the pound has seen Brits pay more for imports, with households copping something of a hit to their budgets as wages have not risen commensurately.
While there is an expectation that inflation in these major advanced economies is set to gather pace as growth in their respective economies recovers, the situation in the US could prove instructive. To paraphrase Janet Yellen, US policy makers have been surprised (read: bemused) by enduring low inflation underscored by low wages growth despite accelerating economic growth and a labour market arguably at full employment.
Turning the focus domestically, sharply rising household energy costs (outside of WA, at the start of the current financial year households experienced up to 20 per cent increases in their energy bills) will put pressure on inflation. Nevertheless this price hike will ‘wash through’ the CPI readings after four quarters.
Critically, without growth in wages, these higher energy costs (near impossible to avoid) are likely to simply dampen household expenditure in non-essential areas. Already retail spending has slumped since the start of the new financial year, suggesting that this is the area where households are cutting back. Ultimately, this will serve to keep a lid on inflation (at least in this retail element of consumer prices) – in the face of weak demand, retailers won’t have much scope for lifting their prices.
There are obviously challenges ahead for domestic policy makers who have to deal with the very real risk that low inflation will remain insistently the same for much longer than anticipated.
Outside of policy-land, the aforementioned shift in the Australian economy will nevertheless be consequential for those participating in and looking to navigate the building and construction sector. That is, the construction sector naturally reflects the shifts that befall the domestic economy. Increased building and construction activity goes hand in glove with expanding activity within the economy’s different sectors and locations and vice versa.
The Construction Monitor publication provides the details behind the momentum in public sector building and construction activity among all the subsectors of construction. In particular, with public infrastructure investment largely determined on a state level, there are distinct geographic traits to this investment cycle, with the eastern seaboard states the main beneficiaries.
Victoria is leading the way on the back of investment in health, education and aged care infrastructure and building.
Construction in NSW has been boosted by investment in transport infrastructure, making it the top ranked jurisdiction for work on ‘roads, highways, and subdivisions.’ This is supplemented with strong activity in the ACT, where a new metro system is creating significant activity. Queensland rounds off the eastern seaboard states with most subsectors performing well.
Activity in Tasmania has also been relatively strong with investment in new and upgraded electricity generation and transmission supplemented by strong levels of activity in building of hotels and education buildings.
While the curtains have closed on the mining boom, the ‘heavy industry’ category of engineering construction was still a source of strength for the NT. Moreover, commercial building was another source of growth for the Territory’s broader construction sector – a surprising result that seems to defy the wider context of the end of the mining boom dampening overall economic conditions.
The SA economy has endured a run of underperformance, and this is evident in the performance of the state’s level of construction activity. WA’s ranking continues to suffer from a high base effect, whereby the high levels of building and construction during the mining boom era has set a very high benchmark from which we are comparing current activity.
As the growth switches between economic sectors the impact on regions has also switched. With commodities prices not recovering, there is promise of a new round of investment if the current energy crisis and political challenges do not prevent Australia from attracting scarce global funds for new projects.