Construction data shows private sector activity picks up, but economists warn on outlook

Official construction data for the June quarter has revealed a clear shift towards private sector activity from government-funded work, but one economist warns the outlook for industrial and commercial building is still uncertain.

The warning comes despite major economists hailing the result as a positive indicator for construction over the next year, with the mining sector in Western Australia taking a large portion of the work.

Housing Industry Association economist Andrew Harvey says the news is positive, but with interest rates set to rise and finance still difficult to obtain, industrial and commercial activity will lag.

“This is good news in the sense that there’s been a collection of work waiting to be done, and yesterday was the first time we saw that come through,” he says.

“But this is a very lagged indicator. The Government stimulus worked to prop up the housing industry, but this tells us nothing about going forward and all the leading indicators over the medium-term tell us the outlook isn’t very positive. Growth for the next couple of years will likely be flat.”

The Australian Bureau of Statistics data revealed the seasonally adjusted value of construction work done was up 3.5% to $41.7 billion in the June quarter. Residential building recorded the highest increase at 7.7%, with non-residential work up by 2.6%.

However, despite the residential sector performing well, recent indicators show the commercial and industrial sectors are set to suffer over the next few years, despite the recent rise in activity.

In June, the RBA argued bad loans in the commercial property sector are a greater threat than mortgage stress, while earlier this month NAB said its commercial property indicator revealed activity fell in all key areas – office, retail, industrial and entertainment construction.

Harvey says while the June quarter result will add to GDP, “the outlook is certainly not bright”.

However, other economists disagree with that assessment and believe the industrial and commercial sectors will perform relatively well.

CommSec economist Craig James believes the activity will add 0.3 percentage points to GDP for the June quarter, and noted the results show this is the first time in two years work in the private sector has overtaken work in the public sector.

He points out engineering work increased by 1.5% in the June quarter, with private activity up 5.1% and public work down 3.8%. Commercial building work in the private sector was up 2%, with public works up 3.4%.

He says businesses have been given a confidence boost due to domestic and international improvement in global economic activity, and that this will flow over the rest of the year.

“Looking forward it is likely that private sector spending will continue to remain healthy over the coming year as businesses get back to focus on growth avenues and take on further investment. And more importantly the outlook for construction-dependent businesses is clearly buoyant with a near record $44 billion of construction work remaining to be completed.”

“The outlook for commercial and residential construction activity is very positive. Construction work yet to be done stood at $43.8 billion in the June quarter, down a modest 2.2% from record highs.”

But James also noted there are challenges ahead for the construction and industrial building sectors.

“The key challenge [will be] to keep cost pressures under control. Looking forward infrastructure projects, fast population growth and the booming mining sector will buoy activity in the longer term.”

“The one area that may concern the central bank is that the demand for labour and resources will lead to higher costs, boosting inflation across the economy. While construction costs are rising only modestly at present they have risen for the past three quarters, and are now higher than a year ago.”

Westpac senior economist Andrew Hanlan said the outlook for private construction is positive, pointing to figures showing the value of work in the pipeline at the end of the quarter increased by over 2%.

“Not surprisingly the mining state of Western Australia led the way in the June quarter, with activity surging 12% (up $1.1 billion). That explained half of the nation-wide rise in construction work.”

“The good news was that Queensland, which has been the weak link, recorded a solid 2.4% rise in construction work in the quarter – partially reversing the 6% decline over the previous six quarters.”

However, he also said housing construction will falter during 2011 due to the impact of rate rises earlier in the year.

The debate also comes shortly after Consult Australia chief executive Megan Motto told SmartCompany commercial building will struggle over the rest of the year as businesses are unable to raise finance.

“Simply no one is building them, and particularly in Sydney where you’ve had high office vacancy rates, there simply hasn’t been any need to build. Commercial building is always led by the private sector, and the freeing up of capital has been thin.”