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).
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.
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).
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).
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.
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.