A Report on Construction Industry Economics Outlook

Introduction

The construction industry in Australia has over the recent three years provided increased employment thereby improving the economic financial performance. This has been fueled primarily by middle market construction firms. However, forecast shows that the total non-residential construction would fall between 2014 and 2016 due to falling levels of investment on project activities (Kraatz, Mitchell, Matan & Newman, 2015). The economic deficits incurred in the construction industry would be offset by investments in the telecommunication and commercial construction, especially in apartment building.

There however are challenges in the industry occasioned by uncertainty on future spending on construction projects by the government. Moreover, the cost of doing business and the ability to increasingly make revenue have created a challenging environment for the construction firms. Therefore stakeholders in the construction industry are concerned with whether the government would increase its spending and whether the public construction projects will be available in the future since less than 10 percent are currently financing their clients (Liu, Love, Sing, Carey & Matthews, 2014).  

The Industry’s Contribution and Influence on the Macro-Economy

The productivity and contribution of the construction industry are made using the Australian Bureau of Statistics Econtech analysis data. A Baseline and ABCC scenarios to show the contribution of the construction industry on the macro-economy. The ABCC scenario;

ABCC Scenario
Consumer Price Index -1.2 percent
Real Consumption 0.8 percent
Annual Economic Welfare Gain, $5.1 billion
Gross Domestic Product 1.5 percent
Gross National Product 1.2 percent

The ABCC scenario thus shows a 1.5 percent gain in the level of Gross Domestic Product in comparison to what it would have been.  

The industry has contributed to the economy by improving labor productivity as shown by the ABCC Scenario, thereby reducing the business cost across the economy, since other industries make use of engineering construction and commercial building, which in turn translates into reduced consumer prices as well as lower cost of new construction. Moreover, significant contribution to the macro-economy has been seen through employment, whereby the total employment went up by 1.1 percent in the year leading to July 2014 from 0.9 percent a year earlier (Liu et al., 2014). There was an increase of 1.2 percent and 1.9 percent in on-site and subcontract tradesmen, though the offsite employment went down by 2.8 percent. Moreover, up to June 2015 off-site employment would increase by 0.6 percent while sub-contract tradesmen would increase by 0.9 percent to offset the fall in on-site employment of -1.0 percent (Fulford & Standing, 2014).

Analysis of Statistical Data

During the second half of 2014, the construction industry experienced a period of weaker resources and infrastructure projects. This was evidenced by reports by firms that they operated at busy to very busy activity levels during the six month period to June 2014. However, players in the sector expected the activity to continue falling up to June 2015 with improvement expected in the 2015/2016 financial year at 47 percent fueled by improvements in the key infrastructure and commercial construction sectors (Jiang, Xu & Liu, 2014).

The capacity utilization level in the industry parallels the average level witnesses in the five years to June 2014 but is lower than the 2007/2008 figures which stood at 90 percent which was before the global economic crisis. In 2014/2015 stakeholders expect a decline in turnover growth of 3.9 percent, while the value of infrastructure work is expected to go down by 4.4 percent. A positive light will be seen in the telecommunications sector, which is expected to grow by 8.2 percent due to investment from the NBN network. Moreover, other civil projects forecast a rise of 6.1 percent thereby showing terminal development and port expansions which would cater for growing exports resources. This would be complimented by the strengthening of the value of commercial construction work, which is expected to grow by 6.1 percent due to large pipeline and developments projects (Hughes & Thorpe, 2014).

The 2014/2015 budget sought to stimulate the construction sector to create more jobs to support the national prosperity through an investment of $50 billion which would see a spending of $125 billion on new infrastructure. The sector is also projected to boost the economy in the long term by 1 percent. An instance into the projected growth of construction industry is the New South Wales Construction where a project valued at $11 billion would provide more than 10,000 jobs. Further the budget set aside $1billion for the National Stronger Regions Fund as well as new Black Spot funding of $200 million and roads to recovery fund of $350 million. All the projects are expected to provide money into the communities in a bid to lower the business cost thereby reducing congestion and boosting the living standards of the Australians (Kraatz, Sanchez & Hampson, 2014).

A decline of 7.5 percent in 2014/2015 is expected in the engineering construction followed by a further 3.4 percent decline in 2015/2016 brought about by a reduction in the work levels in major project categories and particularly the mining sector. However, a recovery is projected in the commercial construction with an expected expansion of 6.1 percent in 2014 and 2015, followed by a further consolidation of 3.2 percent in 2015 and 2016 (Hughes & Thorpe, 2014). This indicates a forecast of sustained growth over the two years in private building activity with the apartment building sector expected to maintain a growth of 11.1 percent with further moderation of 6.3 percent in the financial year 2015/2016.

Forecast of Growth Sectors in the Construction Industry 

Growth in the Australian construction industry is expected to vary with the geographical location and sector the contractors are operating as forecasted by the Australian Construction Industry Forum. The report projects that the building and construction projects’ overall dollar value would ease back from $233 billion to $228 billion by the 2014/2015 financial year. The players in the construction industry expect a major or moderate difficulty in the purchasing and hiring of construction equipment by 22.6 percent. The moderation is likely to result from the effect of the strong Australian dollar, which brings with it a reduction in the local currency costs of imported materials (Fraser, Macdonald & Mullineux, 2014).

The monetary policy growth is expected to lead to improvement in the construction industry due to the resulting growth in resource exports as well as robust consumption growth even as household income takes a dip. The treasury however forecasts a growth trend of 2.5 percent in the 2014/2015 fiscal year. Moreover, the fiscal consolidation at the state and federal levels of government would lead to a contribution in growth from government spending to boost the construction industry, especially in the building and civil engineering.

The encouraging signs of the strengthening of the household consumption as well as dwelling investment due to the existing low interest rates is likely to fuel the construction industry as people seek better housing and construction services. According to the RBA, the household consumption took a strong dimension in 2013 and is expected to remain at that up to mid-2016 whereby households are expected to respond favorably to the low interest rates and increasing household wealth resulting to rising prices of houses hence increased profits to the industry players (Jiang et al., 2014). 

The Australian government has planned in the budget a medium-term fiscal strategy to get a surplus by maintaining strong fiscal discipline to mitigate the share of government’s economy over time to ensure that resources are available for private investment in the construction industry to fuel economic growth and jobs. This would be done by reducing the payment-to-GDP ratio and paying down debt through stabilization and reduction of commonwealth government securities on issue over time as well as consolidating the government’s balance sheet through an improvement of the net financial worth over time (Lim, Nguyen & Chua, 2014). 

The forecasts have concluded that economic growth would be below normal thereby increasing the unemployment rate which would affect the construction industry in the short run. This would be followed by some economic recovery, which would see households responding to low interest rates thereby raising the housing investment and consumption growth in 2014 and 2015 fiscal year. The Gross Domestic Product would edge toward 4 percent with unemployment rate falling to 5 percent. Consumption and housing would lead to the economic recovery thereby providing an opportunity for Lake Groups. Further, the monetary policy would move back to neutral in 2014/2015 with the 90-day Treasury bill going up to about 5 percent (Fraser et al., 2014). The manufacturing sector would grow to supply the housing and construction industry with materials as it benefits from the falling Australian Dollar.

 

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