Weak Construction Work to Hit on GDP

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Thursday, May 26th, 2016
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A disappointingly large drop in construction work in the March quarter is expected to weigh on GDP growth.

The amount of construction work fell 2.6 per cent in the quarter, missing economists’ expectations of a 1.5 per cent drop.

The most mediocre result was in private non-residential building work, which slumped by 5.5 per cent over the quarter.

ANZ economists said it was the biggest quarter-on-quarter decline in that sort of construction work since 2009.

“We view this as a disappointing result as it suggests that the construction component of non-mining business investment remains weak,” they said in a note.

Engineering construction unsurprisingly slumped again, by 4.2 per cent, amid the cooling mining sector and large liquefied natural gas projects moving from construction to production phases.

Commonwealth Bank head of economics John Peters said one positive was a rise in public sector construction, which rose 2.5 per cent in the quarter, and public sector engineering work, which rose 2.2 per cent.

He said the much vaunted lift in public sector infrastructure may be finally starting to take wing after being a drag on GDP since 2010.

“So fingers crossed, public infrastructure activity may actually add to GDP growth in 2016,” Mr Peters said in a statement.

“The small lift in public construction in the first quarter is certainly a step in the right direction. More needs to be done.”

JP Morgan economist Tom Kennedy said residential construction, which rose 1.5 per cent, was another bright spot for the economy in the March quarter.

However, he noted that that kind of construction work remained awkwardly skewed towards high-density projects, such as apartments, with detached home building falling further.

“Despite the better headline print, higher density construction has a lower multiplier to real GDP growth than detached housing, so the impulse to first quarter GDP will likely be modest,” Mr Kennedy said.

The ANZ economists said despite the gains in home-building, drops in private engineering and non-residential construction would weigh on economic growth.

“These data suggest to us that business investment will be a drag on next week’s GDP outcome,” they added.

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