Engineering Construction

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<div>An interesting week indeed for Australian econofans, with an emphatic rebound in engineering construction reported for the second quarter of the calendar year, driven by Western Australian resources projects (or, at least, one project). </div>
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<div>Then on Thursday, a +0.8 per cent quarterly increase to $28.3 billion was reported for private new capital expenditure, which is not something we've been able to say too often over the past five years! </div>
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<div>The increase was largely driven by a +2.7 per cent uplift in expenditure on plant and equipment to $12.5 billion. </div>
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<div>The improvement lately has been as much about a steadying of the resources states as anything else, although Victoria is now seeing a relatively strong expansion in investment. </div>
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<div>Only a tiny fraction of the lift in investment in Victoria has been driven by mining or manufacturing, instead being overwhelmingly accounted for by services industries and other sectors. </div>
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<div>Perhaps more importantly, the outlook is brightening, with a +17.6 jump in the third estimate for FY2017-18 capital expenditure to just under $102 billion (against market expectations of less than $96 billion, so that's a significant beat). </div>
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<div>Mining investment plans have lifted - though remaining unsurprisingly as subdued compared to the heady peak - while services and other selected industries are beginning to hit their straps, with an increase of +18.6 per cent on prior year expectations. </div>
<p><br><strong><span style="text-decoration: underline;">Construction confounds</span></strong><br><br></p>
<div>AIG's industry surveys, which report on the direction of industry sectors relative to a neutral reading of 50, now record a very strong expansion in the massive services sector (56.4), while manufacturing (59.8) is expanding at the fastest pace in 15 years. </div>
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<div>A salient concern in 2016 was that a disorderly drop in residential construction could lead to widespread unemployment and the strong multiplier effect of that industry going into reverse. </div>
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<div>And yet the construction sector is now top of the pile, with a survey reading of a blistering 60.5 in July. What gives?</div>
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<div>I was down in Sydney this week, and was struck by the burgeoning use of serviced and other office space - you can't help but notice the difference from 2012, when office space was abundant and activity appeared moribund. </div>
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<div>Anecdotal, yep, and yet this has become of the key drivers of the construction outlook. </div>
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<div>Building approvals for office buildings, educational space, and other commercial construction are absolutely flying in New South Wales and Victoria, sending the annual dollar value of non-residential building approved nationally to the highest level on record. </div>
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<div>And while high-rise apartment approvals have, as expected, dropped by a quarter, there has been a more sustainable rebalancing towards approvals for townhouses, boutique apartment blocks, and detached housing.</div>
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<div>A bit of reluctant credit where it's due, too: the manufacturing surveys pointed to an uplift in infrastructure investment as a key driver of the rebound, responding to the ramp up in budget spend. So, a small hat tip for Treasurer ScoMo there, too. </div>
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<div><strong><span style="text-decoration: underline;">New phase</span></strong></div>
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<div>With capital expenditure and engineering construction no longer in material decline after five years of pain, it's fantastic to see the services and manufacturing industries coming to the party to rebalance the economy.</div>
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<div>The only people forecasting an imminent recession now are apparently doing so more in hope than expectation, and the unemployment rate is steadily declining back towards the 4 to 5 per cent range. </div>
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<div>With almost all indicators pointing to improving rather than deteriorating economic conditions ahead, the economy and our housing markets are moving into a new phase, with the household sector to become the main point of focus. </div>
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<div>Specifically there will be a great deal of analysis of household debt, and how households cope with the prospect of a normalisation of interest rates from the end of 2018 forth. </div>
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<p class="p1"><span class="s1">PETE WARGENT is the co-founder of <a href="https://allenwargent.com/" target="_blank"><span class="s2">AllenWargent</span></a> property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank"><span class="s2">blogger</span></a>.</span></p>
<p class="p2"><span class="s3"><em>His latest book is </em><a href="https://www.bigskypublishing.com.au/Books/General-Interest/Four-Green-Houses--and-a-Red-Hotel/1015/productview.aspx" target="_blank"><span class="s2"><em>Four Green Houses and a Red Hotel</em></span></a><em>.</em></span></p>
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Mining cliff Rest In Peace: Pete Wargent

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<p>Engineering firm Bosch inaugurated its $40 million headquarters and technical centre at Clayton in Victoria this week and said it would invest a further $6.2 million in increasing its diode production capacity.</p>
<p>The investment at its 120,000 square metre campus is its single largest in Australia since it set up the wholly-owned subsidiary in 1954. The company has around 800 employees at the centre.</p>
<p>The centre was inaugurated by the Victorian minister for Industry and Minister for Energy and Resources, the Hon Lily D’ambrosia MP.</p>
<p>Bosch's new headquarters will support new businesses, engineering and R&amp;D initiatives, said a media release.</p>
<p>“The new facility is evidence of Bosch’s long-term commitment to diversified activities in this region including sales and distribution, high-tech engineering, advanced manufacturing and further investment into exciting new fields,” said Gavin Smith, Bosch president with responsibility for the region Oceania. </p>
<p><img src="/images/2016/04/22/Screen%20Shot%202016-04-22%20at%206.54.24%20PM.png" alt=""></p>
<p>Most recently, the company invested in Australian start-up The Yield, which focuses on micro-climate sensing technology in agriculture and aquaculture.</p>
<p>Bosch is also working in the areas of Highly Automated Driving (HAD), vehicle connectivity and vehicle security (through secure gateway systems) in Australia.</p>
<p>New business activities in Australia have also been introduced in eBike service, motorsport components sales and innovative software solutions for the Internet of Things (IoT).</p>
<p>In addition Bosch is investing a further $6.2 million in manufacturing for the global automotive sector. The Clayton facility's Diodes production capacity will be increased to cater to its growing international customers. The federal government has also contributed $1 million from the Automotive Diversification Programme (ADP). </p>
<p>The new facility incorporates offices, workshops, testing facilities, training rooms and employee amenities. It has a landscaped courtyard with semi-established trees, and an outside terrace with an alternative working space.</p>
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Bosch's $40 million centre in Victoria inaugurated 

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<p><span>GUEST OBSERVER</span></p>
<p><span>The fall in the volume of construction work done over QIII was larger than market consensus which was for a fall of 2.0% {CBA in line with consensus}.  However, the larger than expected fall follows an upwardly revised 2.1% increase in QII (previously reported as +1.6%)</span></p>
<p><span>There were plenty of familiar themes in today’s result – falling engineering construction was partially offset by a pickup in residential construction.  And non‑residential construction remains weak.  This has been the general pattern in the data for the past two years.  The chart opposite depicts these trends.</span></p>
<p><span>Engineering construction continues to fall as we work our way through the massive downturn in mining investment.  The drag on growth from falling mining investment will continue through 2015/16 and isn’t expected to lessen until 2016/17.  It’s the hangover from a once in a century mining boom.</span></p>
<p><a href="/images/2015/11/25/Screen%20Shot%202015-11-25%20at%203.08.10%20PM.png" target="_blank"><span>Click to enlarge</span></a></p>
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<p><span>Residential construction is powering along and is providing a partial offset to declining engineering construction.  We have a big lift in apartment construction underway across Australia.  And the forward looking indicators, namely the building approvals, suggest that this will continue deep into 2016.  Today’s figures show that the volume of dwelling construction is up 12.4% through the year.  The resultant increase in the housing stock from a big lift in residential construction will put some downward pressure on rent and dwelling price inflation over the next year.</span></p>
<p><span>The breakdown by public and private sectors construction shows that it’s important to look at the reality rather than necessarily believe the rhetoric.  Despite there being plenty of talk around big investment in public infrastructure the data shows that it simply isn’t the case; at least at the national level.  Public construction work done is down 9.8% through the year and has been a drag on GDP growth since 2010.   </span></p>
<p><span>The construction deflators show that inflation in the residential construction sector has picked up a little while it is negative in the engineering space.  It’s unsurprising really given residential construction has picked up sharply while engineering construction is in decline. </span></p>
<p><a href="/images/2015/11/25/Screen%20Shot%202015-11-25%20at%203.10.08%20PM.png" target="_blank">Click to enlarge</a></p>
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<p><em><span>Gareth Aird is e</span><span>conomist at Commonwealth Bank and can be contacted <a href="https://www.propertyobserver.com.au/https://au.linkedin.com/pub/gareth-aird/14/790/905" target="_blank">here</a>.</span></em></p>
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Engineering Construction

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