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

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Thursday, 30 June 2016

Sydney light rail and infrastructure boom underway

Engineering work meanders lower

The Engineering Construction Activity figures for Q1 2016 released by the ABS showed a further 3.3 per cent seasonally adjusted decline in work done for the private sector, for a significant decline of 17.9 per cent over the past year. 

A point which has recently come to pass is that some public sector expenditure is starting to wash into the economy, and this was reflected in a solid 11.4 per cent year on year rise in engineering construction work done for the public sector.

Totting that up, engineering construction activity declined in the first quarter, but only by 1.4 per cent to a total of $23.7 billion. 

Activity has now reverted 31.5 per cent lower since the peak in the third quarter of 2012. 

Although it was suggested at that time that Australia was "leaping off of a resources cliff" which could lead us into a recession, the good news is that this hasn't happened at the national level, nearly four full years since peak construction. 

In fact the economy grew by 3.1 per cent in the year to March 2016.

This is not to downplay the impacts of the downturn on resources regions, which have been brutal in some cases. 

The Wall Street Journal took a look yesterday at the mining community of Emerald by way of an example. 

Certainly the property market there has been yet another mining "hotspot" disaster with rents imploding. 

Source: SQM Research

State dynamics

The slither of good news for regional Queensland is that with construction activity having declined by more than 60 per cent from its peak, at least some of the associated pain is now in the rear-view mirror and the healing can begin. 

Construction activity is still humming along in Western Australia - for the time being at least - with $41.8 billion of work done in the past 12 months.

This number will inevitably decline in due course. 

You may note from the chart below, that activity in New South Wales and Victoria has actually been on the increase for the past six quarters, as Sydney and to a somewhat lesser extent Melbourne begin to enjoy the spoils of a housing and infrastructure boom. 

Indeed, the rolling annual value of engineering work commenced has been consistently increasing for the past year, driven by Sydney's infrastructure boom.

Sydney's CBD & South East Light Rail extension is one part of this phenomenon, as well as other railways work, roads, highways, subdivisions, telecommunications, bridges, electricity transmission, water supply, sewerage, and recreation facilities. 

Good times for the Sydney economy.

The wrap

In trend terms private sector engineering construction was 9 per cent lower in the first quarter of 2016 and some 23.1 per cent lower over the year, which continues to torpedo many regional economies.

The good news for the capital cities is that activity is increasing and the "resources cliff" hasn't been enough to turn growth in the economy negative after four years of declines.

Long live the infrastructure boom.