One week in September...

Jason Anderson, Chief Economist - MacroPlan writes: The first week of September will provide some critical economic readings, in the lead up to the federal election on Saturday 7th. The RBA monetary policy announcement on Tuesday will be closely followed by the GDP result for June quarter 2013, providing data fuel for commentary on economic management. It may prove to be kindling, but there is a reasonable chance for an incendiary outcome from the GDP data – in particular, a negative quarterly result due to weak construction work done.

In the previous March quarter 2013 outcome, household spending and international trade were the basis for a positive GDP result. These two segments compensated for an outright decline in the investment components of GDP – particularly mining & civil work (as shown in the chart below).

CaptureThe available evidence to date for June quarter 2013 is not encouraging:

  • Retail trade volumes were flat (following a large 2.2% quarterly rise in March quarter 2013).
  • The international balance on goods and services deteriorated, following two quarter of substantial improvement (the boost to mining exports is still some time away).

Consequently, the focus is back on investment: building activity, engineering construction and equipment spending. Building activity is likely to improve by only a small amount in June quarter 2013. With weak results in most segments, a modest decrease in engineering construction would be enough to generate a negative quarterly growth rate for GDP.

The result for any given quarter is perhaps not critical, but a change in trend across sectors is urgent. An extended decline in engineering construction (mining and civil works) is beginning, following an extraordinary expansion from 2010 to 2012. To compensate, RBA rate cuts have been trying to ignite building activity (mainly housing) but to no avail – this segment has been flat for many years now.

It seems unlikely that an upturn in residential building will offset declining levels of mining construction work. Our numbers show that if engineering construction work done declines by 10% in both FY2014 and FY2015, then national dwelling starts would need to rise from about 155,000 in FY2013 to 200,000 in FY2015 to fully compensate. Low interest rates would not be sufficient to generate this outcome – there is an extensive micro-economic reform process required.

‘Transitioning’ and ‘productivity’ have become generic blanket terms that tend to smother discussion of deeper problems facing Australia’s overall construction sector. It might be fitting if the June quarter 2013 GDP result, days ahead of the election, shifts the political focus squarely to the need for action.

If you would like more information about this article please contact Jason Anderson, Chief Economist on 02 9221 5211 or