According to leading industry analyst and economic forecaster, BIS Shrapnel , the construction sector, which held up the Australian economy through the GFC and later is running out of steam.
However, BIS Shrapnel’s latest Economic Outlook Bulletin says that there is no need for concern as the sector is expected to pick up from here.
The construction sector is changing gears with some areas winding down after strong activity, many continuing on and yet others recovering after a dismal period.
While huge fluctuations can be expected in some sectors, there will also be solid aggregate growth.
Dr Frank Gelber, Chief Economist, BIS Shrapnel says that current trends indicate rolling construction cycles with marked differences between sectors.
He points out that there is a switch from government-funded to privately-funded investment as the primary growth driver.
Till six months back before the switch in activity, both building and non-building construction had been growing strongly, initially under the impetus of private investment, but driven by public spending in the last two years.
The GFC, domestic credit squeeze, collapse in confidence, the resultant economic downturn and government stimulus were some of the factors that affected residential building, non-residential building and engineering construction.
Residential building suffered a further setback during the GFC. The boost to government housing offset the weakness of the private sector.
Expenditure on public housing is winding back and will halve over the next few years. Private sector residential building has again stalled, but as finance becomes available, the sector is seeing the first signs of recovery and growth should pick up momentum over the next two years.
Non-residential building remained strong until the middle of last year. On the private side, the downturn came earlier, progressively turning down since early 2009 as projects begun before the GFC hit were completed.
BIS Shrapnel says that strong public expenditure, driven by a doubling of expenditure on schools and strong investment in hospitals offset much of this decline until recently.
BIS Shrapnel is forecasting a total fall of four per cent in non-residential building this year, followed by a further decline of 10 per cent next financial year as recovery in the private sector is offset by falling government-funded construction.
BIS Shrapnel warns it's easy to overstate the impact of resources-related investment, including expenditure on rail and port facilities.
The outlook is for continued declines in publicly funded engineering construction as major projects are completed.
While there will be continued expenditure on the National Broadband Network and on remediation following the floods and cyclone in Queensland, pressure on budget deficits will ensure cuts in activity.
On the positive side, that will make room for expenditure in the private sector.
BIS Shrapnel's forecast is for solid rather than spectacular growth in total engineering construction over the next few years, averaging between seven and eight per cent per annum.
The current weakening in construction is temporary with the private sector receiving a boost initially by resources-related investment and later by commercial and industrial building, offsetting the fall in public construction.
The outlook for total construction is solid rather than spectacular. Taken together, many of these rolling investment cycles cancel themselves out with:
- Weakening government spending offset by emerging private sector investment
- Next round of minerals projects already starting to boost engineering construction
- Moderate recovery in residential investment offsetting cutbacks in government housing
- Recovery in commercial and industrial building offsetting the decline in social and institutional building
Highlights of the report:
- Public construction, having risen by more than 50 per cent over the last two years, will end up growing by around two per cent this financial year and then falling by 20 per cent over the next two years
- Total private construction, having fallen last year will rise by around four per cent this year, and average 10 per cent growth over the next two years
- Growth in total construction held up well through the GFC-induced downturn, moderating to around four per cent this year, with a similar result next year and subsequently picking up pace