Housing contraction contributing to GDP decline

Reduced activity in the housing industry could be partly to blame for the first quarterly contraction in Australia’s economy since 2011, the Housing Industry Association has suggested.

New figures released by the Australian Bureau of Statistics (ABS) last week showed a 0.5 per cent contraction in seasonally-adjusted Gross Domestic Product (GDP) growth for the September quarter, bringing yearly growth down to 1.8 per cent.

The figures mark the first quarterly decline in GDP since the Queensland flood-affected March quarter 2011 and only the third quarterly decline in the last decade.

According to the ABS, private investment in new buildings detracted 0.3 percentage points from GDP growth, and is reflected in the output of the construction industry, which fell 3.6 per cent for the quarter and was the largest contributor to the fall in GDP growth on an industry basis.

The national statistics agency added that “subdued activity” in the building industry contributed to a decline in the income of small businesses, with gross mixed income down 5.8 per cent.

Commenting on the news, Housing Industry Association (HIA) economist Geordan Murray said: “The value of investment in residential building declined by 1.4 per cent in the quarter, however it remains 7.2 per cent higher than in the September quarter a year earlier.

“In the context of the residential building cycle reaching a record high, the decline in investment in the sector and the role that it played in the overall contraction in GDP is likely to be a point of discussion,” he said.

According to the HIA, the 1.4 per cent decrease in aggregate investment in residential building was the result of a 1.6 per cent decline in work on building dwellings, and a 1.0 per cent reduction in renovations activity.

“Quarter-by-quarter fluctuations are expected and poor weather has been blamed for the weak result for the construction sector in the September 2016 quarter,” Mr Murray elaborated.

“The latest quarterly decline is not likely to herald the turning point for residential investment just yet. There is still a significant volume of work that remains to be done on projects at various stages of construction which will see the level of investment remain at a historically high level over the next few quarters,” he concluded.

Looking at private sector investment, Mr Murray noted that it was positive that investment in machinery and equipment had increased and that the agricultural sector had “made a strong contribution to growth”, however, he said these were “outweighed by quite a significant drop in new non-residential building along with the modest reduction in residential building investment”. 

Although Mr Murray said that the residential building result may have contributed to the weak GDP result, he suggested that the most significant factor detracting from growth was a reduction in capital investment by the various levels of government.

“A reduction in defence expenditure was a significant item, while there was also a significant reduction in capital investment by state and local governments,” he said.

He added that the “widely anticipated” contraction in mining-related engineering investment also continues to “weigh on growth”.

[Related: GDP result ‘shockingly weak’: ANZ]

 

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Francesca Krakue

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