Total construction work fell by 4.9 percent in Q3: Westpac's Andrew Hanlan

GUEST OBSERVER

Construction work is trending lower from historic highs, led lower by the mining investment downturn.

With the construction sector accounting for around 14 percent of the economy this is a material headwind.

Total construction work fell by 4.9 percent in Q3, exceeding expectations (Westpac f/c -1.5 percent and market median -1.6 percent).

Over the past year, construction activity is down by 11.1 percent.

The September quarter outcome will subtract in excess of 0.5ppts from quarterly GDP.

This outcome adds to evidence that the economy hit a soft spot in the middle of 2016, as suggested by soggy labour market conditions.

We expect the economy to emerge from this weakness, with conditions to improve in 2017, supported by recent RBA rate cuts and a spike in commodity prices.

Downside surprises were in housing and public works, both of which are likely to improve in coming quarters given the recent strength of approvals and commencements.

Housing approvals rebounded to hit record highs in 2016, supported by lower rates, and state governments are committing to additional infrastructure projects – particularly for transport.

The private non-residential building cycle has turned down, reflecting earlier weakness in approvals. The drop in activity in the quarter was sharper than anticipated, -12.9 percent vs f/c -1.4 percent.

More recently, non-residential building approvals have begun to lift from their lows, pointing to an emerging stabilisation and potential improvement in 2017.

The decline in private infrastructure was largely as anticipated, -6.6 percent vs f/c -8 percent.

By state, construction work fell across the mainland in Q3 – including falls of 2.1 percent in NSW and 6.9% in Victoria.