Australia’s total construction falls sharply in Q2 on decline in mining-related engineering construction

Construction work in Australia declined steeply in the second quarter of 2016 due to a sharp drop in mining-related engineering construction. Total construction fell 3.7 percent in the second quarter, negatively contributing 0.5 percentage points to the second quarter GDP. This is the biggest decline since the third quarter of 2015. On a year-on-year basis, construction dropped 11 percent.

“On a GDP basis, we estimate that construction subtracted 0.5pp from Q2 GDP after taking 0.1pp off in Q1. This is the largest subtraction since Q3 2014”, said ANZ in a research report.

The decline in total construction was primarily driven by a large drop in engineering construction. In the second quarter, private engineering construction fell 14 percent in the second quarter, the biggest decline since early 1980s recession. In three of the last four quarters, construction has declined at a double-digit rate. At present it is 36 percent lower than one year ago. This huge decline shows the unwinding of the record boom in mining investment.

Mining investment is expected to be a huge drag on the economic growth, while most of the adjustment is likely to be over by mid-2017, stated ANZ. Meanwhile, residential construction grew strongly in the second quarter. Adjusting for the underreporting of renovations to existing homes, the total construction is likely to have grown 2 percent in the second quarter following a growth of 2.4 percent in the prior quarter, according to ANZ.

Over the past year, construction grew 8 percent. The activity is likely to be underpinned in the rest of 2016 by a very high level of building approvals and a record backlog of work remaining. The contribution from residential investment to the GDP growth is anticipated to decline as the backlog is used up.

Non-residential building construction was little changed in the second quarter, dropping 0.5 percent. New South Wales took a breather following a series of strong results. On a year-on-year basis, non-residential building construction dropped 3 percent, while the approvals in this segment imply that construction would remain subdued.

Meanwhile, public construction recorded its most solid growth in five years. Total construction was up 5 percent in the second quarter. Growth was widespread as housing, engineering and non-residential construction recorded strong increases.