Construction sector under pressure, but recovery on horizon

Construction activity fell sharply during the first three months of the year, but economists are tipping a recovery in late 2009, as infrastructure and housing projects come on line.

New figures from the Australian Bureau of Statistics show a 3.7% decline in construction activity in the first quarter, with private sector construction falling by 6.2%.

On a state basis, Western Australia suffered a 7.1% decline, with New South Wales and Queensland down by 3.3% and 2.3% respectively. Tasmania experienced the biggest decline at 21.5%, with activity in Victoria falling by just 1.6%.

The only state to record an increase in activity was South Australia at 0.6%.

Construction of private residences dropped by 6.1%, along with renovations which fell 3.8%. Despite the Government’s increased grants for construction of new homes, private residential construction dropped 6.5%.

Private non-residential building activity fell 6.3%, with private infrastructure building also falling by around 6% following a 27% rise during the 2008 calendar year.

But the news isn’t all bad. CommSec chief economist, Craig James said in a statement that while construction costs soared over the past year, they have now fallen by a record 1.9% in the first quarter, offering benefits for business looking for new offices.

“The more settled cost environment is beneficial for planning, margin stability and profitability,” he said.

James also warned that despite construction activity falling from record highs, GDP growth may still remain in positive territory.

“It is still touch and go whether the economy contracted over the period. Higher retail spending, firm farm activity, stable exports and lower imports supported economic growth in the quarter.

“By all accounts the drop in construction activity will prove temporary. Governments are in the process of ramping up infrastructure spending, while private sector firms are more active as a result of spending by the Federal Government, especially for schools and social housing.”

Westpac senior economist, Andrew Hanlan also said that the housing market should start to improve over the last six months of the year.

“An upturn in residential construction activity is in sight. Housing finance is well up from its lows and that suggests construction work will begin to recover over the second half of this year. The very low interest rates now in place and the Commonwealth’s boost to the First Home Buyer Scheme are certainly having a significant positive impact.

“While some may fret that rising unemployment has the potential to derail the housing construction recovery, history shows that such concerns are misplaced. Housing construction will lead the Australian economy out of this recession – as was the case in the recessions of the early 1980s and the early 1990s.”