• The volume of construction work done rose by 0.3% in QI.  It is 2.6% higher through the year.
• Residential construction surged by 6.8% while non‑residential construction fell by 1.5%.
• Engineering volumes were down 1.6% from near record highs.
• Private sector construction work done rose by 2.0% in QI while public sector construction fell by 6.8%.
• Construction work done will make a small positive contribution to QI GDP growth (published 4 June)

A modest lift in the volume of construction bettered market expectations

The modest lift in the volume of construction work done over QI bettered market expectations which were centred on a fall of 0.5% {CBA (‑0.3%)}.  The increase followed an upwardly revised fall of 1.1% in QIV (previously 1.0%).  The headline result is on the soft side, but the good news is that the desired lift in non‑mining construction is occurring.  In particular, residential construction has surged which is consistent with the big lift in building approvals over the past year.

Engineering construction fell by 1.6% from near record highs.  A fall was anticipated and is consistent with our previously held view that mining construction would peak in H2 2013.  The magnitude of the fall was roughly in line with expectations.  Looking ahead, some large scale LNG projects will support engineering construction over the near‑term.  But we have reached the peak in engineering investment and we expect declines to continue over coming quarters.

Policy makers will take some comfort from the surge in residential construction over QI.  Despite a big lift in building approvals, we hadn’t yet seen a commensurate lift in residential construction.  This was due to the lift in approvals being driven by multi‑density dwellings (i.e. apartment blocks) and there is a longer lag between apartment approvals and work commencing compared with houses.

We expect to see further increases in residential construction over the coming quarters. A lift in dwelling investment will absorb some of the job losses from the mining capex downturn.  And a lift in housing supply will also help slow the acceleration in house price growth observed over the past year.

Non‑residential construction fell by 1.5% and remains soft.  The value of non‑residential building approvals lifted by 4.3% over the six months to March so we expect to see non‑residential construction lift over coming quarters.

The national lift in construction was driven by the non‑mining states of NSW (+5.1%) and Vic (+4.4%).  And it was in the residential construction space.  WA recorded a modest lift in construction (+1.3%) while QLD recorded a fall of 4.4%.  It’s worth keeping in the mind that the quarterly state construction figures tend to be quite volatile.

In summary, a data print today that will provide some comfort to policy makers.  The recent strength in building approvals has translated in a substantial lift in residential construction, while the decline in engineering construction has been expected for some time now.

The focus now turns to the ABS capital expenditure survey published tomorrow (28 May).  It will contain figures for actual capital spending in QI, the sixth estimate of 2013/14 capex spending and most importantly the secondestimate of 2014/15 capex spending.  Although somewhat limited in its coverage, the second reading of estimated spending in 2014/15 will send a signal about whether the desired transition from mining investment to non‑mining investment is occurring.

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