Construction is “running out of steam” but should start to pick up, according to BIS Shrapnel’s Economic Outlook Bulletin.
BIS Shrapnel argues there will be huge both upwards and downwards fluctuations in some sectors, but aggregate growth will be “solid rather than spectacular”.
“What we’re seeing is rolling construction cycles, with marked differences between sectors,” says Dr Frank Gelber, chief economist, BIS Shrapnel. “In particular, there is a switch from government-funded to privately-funded investment as the primary growth driver. Through all of this, resources investment has remained strong, despite the pause as we switched from one round of projects to the next through the hiccup of the GFC.”
It’s important to look at the different drivers of individual sectors to understand what’s happening in construction, according to BIS Shrapnel.
The clue to the future, it says, is contained in the switch in activity over the last six months. “Before that, both building and non-building construction had been growing strongly – initially under the impetus of private investment, but driven by public spending in the last two years.”
“The GFC, the domestic credit squeeze, the collapse in confidence, the resultant economic downturn and government stimulus played a major role in the course of events,” says Dr Gelber. “Residential building, the non-residential sector and engineering construction were all affected.”
The bulletin highlights government housing more than tripled during the GFC, offsetting the weakness of the private sector, however expenditure on public housing will halve over the next few years.
“Meanwhile, private sector residential building, having picked up a little through the middle of last year has again stalled,” says Dr Gelber. “Only now, as finance becomes available and we dust off medium and high rise developments, are we seeing the first signs of a resumption in the private residential recovery. Growth should pick up momentum over the next two years.”
The organisation notes non-residential building was strong until the middle of last year. The downturn in the private sector began in early 2009 as projects before the GFC arrived were completed.
“It was extraordinarily strong public expenditure, driven by a doubling of expenditure on schools and strong investment in hospitals, which offset much of this decline until recently,” says BIS Shrapnel. “But now, over the last six months, public expenditure on non-dwelling building has been winding down as projects are completed.”
“With private sector commercial and industrial building slaughtered by the lack of funding throughout the GFC, and still weak, total non-residential building has fallen sharply over the last six months,” says Dr Gelber. “The government sector has further to fall and the real issue is how quickly a recovery in private investment comes through to take its place.”
Non-residential building is expected to fall four per cent this year, followed by a further drop of 10 per cent in the next financial year “as recovery in the private sector is offset by falling government funded construction.”
BIS Shrapnel says public construction has risen by more than 50 per cent over the last two years. It expects it will grow by two per cent this financial year and then drop by 20 per cent over the next two years.
Total private construction is expected to rise by around four per cent this year and average 10 per cent growth over the next two years.
Growth in total construction has moderated to around four per cent this year, BIS Shrapnel says, and a similar result is expected next year before “picking up pace”.
(By:Switzerbroker Bulletin www.switzer.com.au, Published on: Friday, March 04, 2011)