Construction slump could trigger spike in unemployment

The latest ABS data released this week shows total construction work fell by 4.9 per cent in Q3, exceeding market predictions of a 1.6 per cent decline. Construction activity is now down by 11.1 per cent over the year.

According to Westpac senior economist Andrew Hanlan, the figures add to evidence that the economy hit “a soft spot” in the middle of 2016, as suggested by “soggy labour market conditions”.

“We expect the economy to emerge from this weakness, with conditions to improve in 2017, supported by recent RBA rate cuts and a spike in commodity prices,” Mr Hanlan said.

“Downside surprises were in housing and public works, both of which are likely to improve in coming quarters given the recent strength of approvals and commencements.”

However, the private non-residential building sector was hit hardest, reflecting earlier weakness in approvals. The drop in activity in the quarter was sharper than anticipated, down 12.9 per cent compared to Westpac’s forecast of a 1.4 per cent fall.

ANZ estimates that construction subtracted a massive 0.7pp from Q3 GDP after taking 0.2pp off in Q2.

“This would be the largest subtraction since the GST-related collapse in housing construction in 2000,” the group said.

The major lender was surprised by the weakness in residential construction after the sector gained 3.7 per cent in Q2.

“The fall in housing construction is surprising, given ongoing strength in building approvals and a record backlog of work in the pipeline.”

Prior to the release of the ABS figures, Fitch Ratings managing director Ben McCarthy flagged construction as a potential risk for the economy.

Speaking at the Australian Securitisation Forum in Sydney on Tuesday, Mr McCarthy said the construction industry contributes close to 10 per cent of total employment, compared to the mining sector’s 2 per cent.

“One of the reasons to point this out is the mining downturn that people talk about has very little impact on employment and we didn’t see that come through in the performance of housing,” he said.

“The issue with construction is that if we did have a bursting of a bubble or a construction downturn then you would see significant change in unemployment across the market.”

Mr McCarthy highlighted the construction-driven property bubble in Ireland in 2008 as an example of what can happen to jobs and consequently housing markets when the sector experiences a downturn.

“When you look at the Ireland property bubble, their construction got to 14.5 per cent of GDP in 2006,” he explained.

“Unemployment was around 4.5 per cent then. By 2008 construction was only 4.5 per cent of GDP and their unemployment rate was 15 per cent and 85 per cent of those jobs were in the construction sector.

“If you play out those numbers in Australia, you get similar numbers.”

[Related: Asian investors fund local lender in bullish developer play]