‘Animal spirits’ guide construction recovery

Forecasts are down for the engineering construction sector but economists are crystal-ball-gazing to see where the sector will end up.

The residential construction sector has been picked to carry the ball but its recovery has not been a swift starter. Expectations that residential will rise in the next 6-12 months are not meeting actual figures.

A rise in commercial construction has also been flagged but is not expected for 18 months at least.

A BIS Shrapnel report released today states the engineering construction sector, responsible for transport, mining and other heavy industry projects, was set for a 7.6% decline this financial year. The figure is a jump on a March forecast of a 5.4% slump, The Australian reports.

The report states engineering construction peaked in 2012-13 and is expected to plummet 19% over the four years to 2016-17.

A Master Builder’s Association survey on confidence in September has shown a drop in sales, work on the books, and expected activity exceeding actual activity.

MBA chief economist Peter Jones said the construction industries were still gleaning the depth and rate of the drop in engineering construction. He said the MBA’s forecasts predicted a 9.9% drop this year and a 20% drop over three years.

He said all that was needed was a psychological change among business-holders from cost-cutting to growth, “it’s like animal spirits”.

“The key to the outlook is improving confidence,” he said. “We need to have a switch from cost-cutting mode to growth mode.”

The MBA’s September survey of business confidence, released this week stated: “Business conditions fell in the September quarter, and the best that can be said is that the index appears to be finding a floor.”

Housing Industry Association chief economist Harley Dale said the BIS Shrapel forecasts were “reasonable”.

“Residential construction is not looking like filling the void as much as we’d like it to do. It’s a recovery that is taking time to gather breadth.”

He said there was some growth overall, but if NSW and WA figures were excluded here was an insignificant 1% recovery elsewhere.