Filling the gap left by falling mining investment

invest

There have been some positive signs around local economic conditions since the start of the 2015-16 financial year, with Ai Group’s performance indices for the manufacturing, services and construction sectors all showing long-overdue expansion after years of weakness.

Other partial and leading indicators such as the NAB monthly business survey and retail sales are also following a similar trend.

While these are all encouraging developments, the daunting task of replacing the void left by the sharp fall in mining investment should never be underestimated. Inevitably, a once-in-a-lifetime boom in mining construction is followed by a once-in-a-lifetime fall in related engineering construction.

Yes, residential building activity has grown strongly over the past two years, owing to an interest-rate-fuelled apartment investment frenzy, and the pipeline of work is at historical highs (see Chart 1 & Chart 4).

Chart 1: New residential building work yet to be done (no. of units), June 2015

Chart 1: New residential building work yet to be done (no. of units), June 2015

However, the gap left by the aftermath of the resource investment surge is likely to dampen local economic activity for some time to come (see Chart 2). It is no surprise then that the Australian economy has grown at below 3% p.a. since late 2012 and the RBA forecast growth to remain weak (i.e. below trend) until 2017.

Chart 2: All construction value of work yet to be done, June 2015

Chart 2: All construction, value of work yet to be done, June 2015

Apart from residential construction, the picture for the near future is not so optimistic. The outlook for non-mining related engineering construction remains weak, despite some recovery in investment in roads and highways (Chart 3).

Chart 3: Private engineering construction value of work yet to be done, June 2015

Chart 3: Private engineering construction value of work yet to be done, June 2015

Overall non-residential work in the pipeline, particularly commercial buildings, has actually fallen over the past year or so, as has been evident for some time in the weak non-residential building approval numbers (Chart 4).

Chart 4: Residential and non-residential building value of work yet to be done, June 2015

Chart 4: Residential and non-residential building value of work yet to be done, June 2015

Details revealed weakness in pipeline for a range of relatively non-residential categories, including offices, health, education and retail (see Chart 5).

It is to be noted, however, that a lower Australian dollar is helping to turn this dismal trend around. We are already seeing a large tick-up in the value of short-term accommodation (i.e. hotels, serviced apartments) to be built. Entertainment and recreational buildings also appear to be on the up, as a lower currency continues to encourage overseas visitors and redirect Australians to spend more money at home. An aging Australian population is also increasing the demand for the number of aged-care facilities around the country.

Chart 5: Value of non-residential building work yet to be done by selected categories, June 2015

Chart 5: Value of non-residential building work yet to be done by selected categories, June 2015

The task of filling the gap left by falling mining investment has been so far partly filled by a residential construction boom. However, a restoration to trend economic growth (i.e. 3% or more) also needs a meaningful improvement in non-mining, non-residential investment.

A lower dollar, low interest rates, and better business conditions are assisting this process but it is important that these positives are sustained.

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Yi Ming Hu
Yi Ming joined Ai Group as an Economist in 2013. He has broad experience covering economics and financial markets, having previously worked as an economist for the Reserve Bank. Yi Ming holds a first-class Honours Degree in Commerce from the University of Melbourne and is a CFA charterholder and a CPA.
Yi Ming Hu

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1 Comment

  1. Julie toth

    Interesting details here, especially in the non-residential building sector. As you point out, non-res building is being overshadowed by apartments this year but trends within each segment are significant too.

    Reply

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