You are using an older browser version. Please use a supported version for the best MSN experience.

Economists see construction drag on growth

AAP logoAAP 25/11/2016 Garry Shilson-Josling, Economist

Economists this week have continued to wonder how US President-elect Donald Trump might affect the economic outlook, but they've also kept an eye out for local economic news.

The main news was on the volume of construction work done, which fell by a steep 4.9 per cent in the September quarter.

Weather may have had a hand in that, according to National Australia Bank economist Tapas Strickland.

"Given the broad-based declines, it is likely Australia's second wettest winter on record hampered construction activity and we would caution extrapolating too much from these results," he said.

And it foreshadowed weak September quarter economic growth, with the national accounts due on December 7.

"The weaker-than-expected outcome presents downside risks to our preliminary Q3 GDP ( gross domestic product ) expectation of 0.1 per cent quarter-on-quarter," Mr Strickland said.

In other words, growth may have stalled.

Commonwealth Bank's Michael Workman estated the drop in construction, about one seventh of the economy, would strip 0.4 percentage points from GDP growth in the quarter.

And he highlighted the positive role of public sector spending as flagging mining investment continues to weight on private sector engineering work.

"The breakdown by public and private sectors shows that the public sector remains the driver of construction work done (+5.3 per cent), particularly in engineering," Mr Workman said.

ANZ economist Felicity Emmett had a bigger estimate of the drag on growth.

"On a GDP basis, we estimate that construction subtracted a massive 0.7 percentage points from Q3 GDP after taking 0.2 percentage points off in Q2," she said.

"This would be the largest subtraction since the GST-related collapse in housing construction in 2000."

Westpac's Andrew Hanlan also said the subtraction from quarterly growth would likely be more than half a percentage point.

"This outcome adds to evidence that the economy hit a soft spot in the middle of 2016, as suggested by soggy labour market conditions," he said.

JP Morgan economist Ben Jarman said the worst of the mining-related slowdown in engineering work was over.

"Nevertheless, today's numbers are broadly weak, adding to the sense from the retail volumes and trade data (and business surveys) that GDP growth slowed materially in 3Q," he said.

He forecast quarterly GDP growth of only 0.3 per cent.

The average for GDP growth over the past year was in line with the long-run average of 0.8 per, so economists are pencilling in an unusually weak quarter.

And the economy now faces the uncertainty of Trumponomics, with promises of - among other things - a boost to domestic economic growth through tax cuts and a burst of infrastructure spending.

Commonwealth Bank's Joe Capurso pointed to Trump's vow to grow the US economy at four per cent annually.

"That is twice as fast as the average rate of growth since the US economy emerged from recession," he said.

But he said the long-run speed limit, determined by population and productivity growth, is really about 1.5 to 2.0 per cent.

"When growth is above that limit, inflation accelerates and the central bank raises their policy interest rate to cool the economy."

image beaconimage beaconimage beacon