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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Thursday, 23 February 2017

Mining cliff all but finished

Construction flat in Q4

Engineering construction declined by a further 2.2 per cent in seasonally adjusted terms through the December quarter to be 18.6 per cent lower year-on-year at $19.3 billion.

As you can see in the chart below, engineering construction - mainly related to resources projects - peaked at the heady levels of nearly $35 billion back in 2012, but has been retracing ever since. 

The quarterly decline was more or less offset by a 1.3 per cent increase in building work done to $26.7 billion, leaving total construction work done in the fourth quarter all but flat at -0.2 per cent.

Mining cliff nearing the end

In Western Australia engineering construction declined once again to $5 billion in the fourth quarter, down from as high as $12.6 billion only six quarters ago.

WA still has a bit further to fall on this measure, though probably not all that much now, particularly given the enormous rebound in iron ore prices.

Iron ore projects pump out high volumes and reserves tend to be depleted quickly, and as such further investment will be required in existing projects in the Pilbara.

This is one reason why the chart below now appears to be flattening out.

Another reason is that in all of the other densely populated states, including Queensland, engineering construction is no longer in decline. 

It's now 4.5 years since mining investment peaked, with engineering construction down by a punishing 44 per cent from the September 2012 peak. 

In all other states and territories engineering construction work is now flat or positive, although to be fair activity in the Northern Territory will decline a bit further at some point as the Ichthys project investment spend dries up. 

All of this in part explains why the Reserve Bank of Australia is so apparently upbeat in its outlook - within a year engineering construction will have completed its retracement, and thus will stop acting as a drag on the economy for the first time in years.

Building work flourished in 2016

Total building work done has powered higher through this cycle, largely driven by residential construction in the largest capital cities rather than non-residential projects.

The rolling annual figures do now look peaky, though. 

Although the value residential construction work done increased again by 5.7 per cent in 2016, it seems likely that the top will soon be in.

Looking specifically at the construction of attached dwellings (being townhouses, units, and apartments) this sector was still going like the absolute clappers at the end of 2016, particularly in Sydney and Brisbane. 

That said, the top may soon be in here too, with Melbourne apartment construction work done having already apparently peaked back in the June quarter of 2016. 

The wrap

Overall this was a fairly flat national result for construction work done, which as ever masks divergent underlying trends.

Construction work done will be a moderate drag on GDP growth for the fourth quarter.

Although the economy may record a weak result for real GDP growth, at least as importantly nominal GDP and gross national income are set to record a storming run thanks to the commodity price rebound.

The good news is that after 4.5 years resources construction activity at long last looks to be approaching the end of its sweeping downturn. 

However, while residential building approvals suggest that housing construction will remain solid for the next year or perhaps longer, apartment construction in particular looks likely to fall sharply sooner or later.

Excavators, Site, Vehicle