Engineering construction takes a breather

By Leith van Onselen

The Australian Bureau of Statistics (ABS) has just released the Engineering Construction Activity data for the December quarter of 2011, which shows a slowing of activity in the quarter after the huge run-up over the year:

In seasonally-adjusted terms, the value of total engineering construction work done fell -5.3% in the December quarter to $26,180.1m, with the private sector (-7.2%) leading the decline. This drop in activity partly offset the September quarter’s huge rise, where engineering work done rose by 20.8%.

In the 12-months to December 2011, construction work increased by 26.6%, led by the private sector (+39.1%), and has basically risen inexorably since the beginning of the commodities boom in 2004:

The fall in engineering construction work done in the December quarter was driven entirely by a large fall in Western Australia, which more than offset increases in the other states. Below are the quarterly and annual growth rates by mainland state, as well the dollar amounts of work done in the December quarter:

  • New South Wales: +3% QoQ; +9% YoY to $5,221 million;
  • Victoria: +7% QoQ; +9% YoY to $2,936 million;
  • Queensland: +17% QoQ; +62% YoY to $8,576 million;
  • Western Australia: -30% QoQ; +19% YoY to $7,424 million;
  • South Australia: -2% QoQ; +9% YoY to $1,199 million.

You can see from the above figures that the mining states – Western Australia and Queensland – dominate Australia’s non-residential construction activity. As long as commodity prices remain elevated, engineering construction activity will continue to boom. But should commodity prices correct, say through a hard landing in China, than non-dwelling construction activity would likely fall precipitously as mining projects currently in the pipeline get cancelled, adversely affecting Australia’s GDP growth, employment and incomes.

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Unconventional Economist


  1. “As long as commodity prices remain elevated, engineering construction activity will continue to boom.”

    If by ‘boom’ you mean continue to add to GDP then this doesn’t necessarily follow.

    For engineering construction activity to add to GDP it must keep increasing (on an inflation adjusted basis) year in and year out.

    Problem is the current level of capital expenditure is already consistent with very substantial growth in production of minerals and LNG.

    It is entirely feasible that volumes of minerals and LNG produced can keep growing (albeit at a slower pace than currently) while engineering construction takes a big tumble from its current very heady heights.

    Check out the top left chart on pg 3 below to see how far above the norm we already are. Watch out below if you believe in mean reversion!

  2. What proportion of GDP growth has been provided by mining resource development and processing infrastructure over the past 10 years?

    When it falls is when the RBA needs to cut rates and the government move from fiscal contraction to stimulus.

    Eternal exponential growth in this sector is not possible. Some argue that China won’t need any new houses after about 2020 because of the one baby policy’s effect demographics. Others argue that the infrastructure intensive stage of development is already waning or will wane within the decade.

    The Australian move to surplus is painful, the sectoral adjustments too, but the big relief of stimulus and rate cuts will be required when the engineering construction boom reduces and employment falls dramatically in those industries.

    Until then, absent below bottom of range inflation, significant overall falls in employment, or fast falls in house prices leading to bank instability, the RBA ought not cut rates.