Engineering construction at 10-year highs

From

Consumer sentiment; Construction activity

  • Consumer confidence: The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.7 per cent last week to 112.6 after rising 0.1 per cent in the prior week. Confidence is just below the average of 113.2 since 2014. The estimate of economic conditions over the next year was the only sub-component of the survey to increase.
  • Construction activity: The Australian Industry Group Performance of Construction index eased to 53.2 in October from 54.7 in September. Engineering construction activity remained buoyant, rising by 4.0 points to 10-year highs of 60.9, supported by strong infrastructure-related spending. Any reading above 50 signifies expansion or growth of activity.

What does it all mean?

  • Aussie consumers remain cautious. Some would say they remain nonplussed by continued political uncertainty in Canberra. A cooling housing market, especially in Sydney, may also have weighed on sentiment.
  • Retail sales remain subdued, but spending is best described as being ‘average’. Aussies however are benefiting from aggressive discounting and intense competition among retailers with some goods prices, such as clothing, cars and phones near 30-year lows.
  • Strong jobs growth and business conditions may have contributed to a more optimistic assessment of the economy over the year ahead. Interest rates are expected to remain at record lows of 1.5 per cent through to the end of 2018, alleviating some concerns around the health household balance sheets.
  •  The Aussie construction industry expanded for a ninth consecutive month in October, although the pace of growth moderated slightly from September.
  • Across the four major sub-sectors in the survey, engineering construction activity was robust, expanding for a seventh consecutive month to 10-year highs. Government spending on road, rail and public transportation-related infrastructure projects continues to drive engineering jobs, wages growth and construction work.
  • The home building sector also expanded in October, though at a slower rate of growth. While apartment-related activity picked up, it remained at contractionary levels as new orders softened and investor demand continued to wane following the recent tightening of lending.

What do the figures show

Consumer sentiment

  • The weekly ANZ/Roy Morgan consumer confidence rating fell by 0.7 per cent last week to 112.6 after rising 0.1 per cent in the prior week. Confidence is just below the average of 113.2 since 2014.
  • Three of the five components of the index fell over the week:
    • The estimate of family finances compared with a year ago was broadly flat at +8;
    • The estimate of family finances over the next year was down from +23 to +21;
    • Economic conditions over the next 12 months was up from -1 to +1;
    • Economic conditions over the next 5 years was down from +4 to +1;
    • The measure of whether it was a good time to buy a major household item was down from +33 to +32.

Construction activity

  • The Australian Industry Group Performance of Construction index fell by 1.5 points to 53.2 in October, down from 54.7 in September. Any reading above 50 signifies expansion or growth of activity. The index has expanded for nine consecutive months, although the pace of growth has moderated since July when the index peaked at 60.5.
  • The key sub-sectors of the index were mixed in October:
  • Housing activity fell 3.5 points to 53.1;
    • Apartments activity rose 5.4 points to 46.8;
    • Commercial activity fell 0.2 points to 50.1;
    • Engineering activity rose 4 points to 60.9 – at ten-year highs.

What is the importance of the economic data?

  • The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
  • The Australian Industry Group monthly survey of construction activity is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. A reading above 50 points indicates construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.
  • What are the implications for interest rates and investors?

  • Consumers remain cautious. While the number of pessimists slightly outweigh optimists in the latest reading on sentiment, the survey reading is around ‘average’ levels since 2014.
  • Aussie households are acknowledging however that their job prospects are certainly better and businesses are finding it more difficult to find suitable workers. Strengthening demand for workers should eventually translate into a gradual increase in wages growth, boosting consumer confidence and inflation.
  •  Infrastructure-related construction work is booming across the nation. While mining projects have been completed, the handover to non-mining sources of construction, especially road, rail and transport projects are driving growth and creating jobs. According to surveyor RBL, a total of 685 cranes are currently located on projects across Australia (350 in Sydney, 151 in Melbourne and 116 in Brisbane and the Gold Coast combined).
  • There is nothing in the latest data to change our belief that official interest rates won’t change for at least a year.

You must be logged in to post or view comments.