Past Regional Reports
With the effects of COVID having triggered a recession, from which the recovery is expected to be prolonged given the resurgence of the virus, the Australian economy, and by extension the construction industry, faces its greatest challenge in a generation.
Australia construction output 2019
Australia total dwelling unit approvals (2020 forecast)
New Zealand construction output 2019
New South Wales commenced 2020 heading into its third year of severe drought, with large portions of Australia’s eastern seaboard on fire and whispers of an overseas virus that was gathering momentum. By the end of February, most of the fires had been extinguished, but before their embers had cooled, the coronavirus presented a new, fast-evolving and significant challenge to the Australian economy and health system.
Whilst the Federal Government received criticism regarding its preparedness and the swiftness of its response to the bushfire season, the approach to COVID has been quick, decisive and generally well-received. Australia’s first death from COVID was recorded on 1st March. By the end of that month, the following had occurred:
By June, Australia appeared to have a good handle on keeping new cases at bay and had begun to focus on awakening the economy from hibernation. However, a resurgence in the virus occurred, leading to further challenges and uncertainty for its economy, as a recession hit the nation for the first time in 28 years.
While 2.3% growth was forecast pre-COVID, the Reserve Bank of Australia (RBA) downgraded its projection for GDP in its most recent quarterly outlook. A 6% contraction for the year is now anticipated, in advance of a prolonged recovery over the following few years (4% in 2021, down from the earlier forecast of 7%, and 4% in 2022, down from the previous prediction of 5%). However, these projections did not account for the resurgence in Victoria and the resulting Stage Four restrictions.
Meanwhile, the Australian Bureau of Statistics reported negative inflation for the first time in 22 years in Q2, falling by 1.9%, which is the biggest quarterly decline on record. This follows 1.9% growth in 2019, which was still short of the 2%-3% target set by the RBA.
As part of the earlier-mentioned stimulus package, the Government introduced a AU$130 billion JobKeeper payment, which aimed to keep Australians in work and support businesses that had been significantly affected by the economic impact of COVID. Approximately 310,000 employers applied for the JobKeeper allowance on behalf of their workers, with circa 48,000 of these employers in the construction sector.
In figures released in the final week of August, Treasurer, Josh Frydenberg, reported that the effective employment rate had dropped to 9.9% from the April figure of 14.9%, as almost half of those who lost jobs in the earlier stages of the pandemic regained employment. However, significant job losses are expected in Victoria in light of the resurgence in cases there, and this is projected to drive the effective employment rate up to 13%.
Throughout the pandemic, the Government has classified construction as an ‘essential service’, which permitted sites to remain open. Furthermore, in some states, construction sites were allowed to operate on weekends and public holidays, enabling projects to progress by allowing building work to be spread across more days of the week while abiding by social distancing rules. States also pushed through temporary planning acceleration programmes and brought forward infrastructure, health and education projects, in a bid to keep construction workers in jobs and the broader economy running. As a result of these initiatives, up to the June quarter, the construction industry has survived. This is mainly due to underlying demand and the closing out of projects that were already ‘locked in’.
Certain sectors, which were already in decline before COVID-19, have been hit hard. The retail sector was already repositioning itself to accommodate consumer trends towards an online marketplace. This shift in strategy has been fast tracked by COVID, as retailers look to reduce their brick-and-mortar presence and digitize their businesses.
27% decline in new house completions forecast for 2019-2020 and 2020-2021.
Residential house approvals have been on a downward trend since 2015. With no inward migration and the unemployment rate forecast to rise, this trend is set to continue in the short to medium term. In mid-August, Master Builders Australia announced its forecast for a 27% decline in new house construction between 2019-2020 and 2020-2021, with Treasury also projecting a drop to 140,000 new homes in the 2020-2021 period from 170,000.
As international borders remain closed, the tourism and hospitality sector is relying on domestic demand, and this has been further disrupted by the states and territories closing their internal borders. All of this uncertainty has general contractors seeking to secure future work, and we have witnessed competitive tender returns during the first half of 2020. The sectors that are still relatively busy, such as industrial, healthcare, education and data centres are in a good position to avail of these favourable market conditions.
At the time of publishing, the second wave of COVID had hit Australian shores, with Victoria, in particular, experiencing a major spike in new cases. The fact, that prior to 2020, Australia has not had a recession in 28 years, is testament to the strength and resilience of its economy. With the effects of COVID having triggered a recession, from which the recovery is expected to be prolonged given the resurgence of the virus, the Australian economy, and by extension the construction industry, faces its greatest challenge in a generation.
Below, the * symbol denotes graphs/data last updated in March, and so the impact of COVID-19 is not accounted for in the marked items.
New Zealand’s economic activity, as measured by GDP, fell by 1.6% in the March 2020 quarter from growth levels of 0.5% recorded in December 2019. This was the first contraction since the December 2010 quarter and the largest fall recorded since March 1991.
This followed 3.9% economic growth over the 2018-2019 financial year, although there was a significant slowdown in economic momentum in the second half of 2019. Pre-COVID, the International Monetary Fund (IMF) had projected 2.7% growth in 2020 and 2.6% in 2021 in its October 2019 World Economic Outlook.
New Zealand’s first case of COVID-19 was discovered on 28th February and the Government’s response to the pandemic was swift, closing its borders to all non-residents on 19th March, as well as imposing a strict nationwide lockdown on 25th March. This lockdown remained in place until mid-May, and included shutting down construction sites and all non-essential services. The strict lockdown appeared to have the desired effect initially, as the country succeeded in eliminating the virus and came out of lockdown earlier than anticipated.
The government also pledged NZ$62 billion of fiscal support to help revive domestic demand and protect jobs as follows:
Under the scheme, businesses with annual revenue between NZ$250,000 and NZ$80 million can apply to their banks for loans of up to NZ$500,000, for a period up to three years. The Government is guaranteeing 80% of the risk, while the banks are covering the remaining 20%.
Early predictions were that the economy would contract by as much as 19% in the second quarter of 2020. If this proves to be correct, New Zealand will enter its first recession since the second half of 2010. It is also worth noting that while these predictions were tempered due to the success of New Zealand’s initial lockdown strategy, a second wave of infections broke out in Auckland in August, which will undoubtedly have an impact. Meanwhile, the New Zealand Institute of Economic Research (NZIER) has estimated a 6%-7% decline in the annual GDP figure as a result of COVID and the associated lockdown measures.
Pre-pandemic in December 2019, the unemployment rate stood at 4%, down 0.1 percentage points from the previous quarter and was expected to hold steady at 4.2%, despite the abovementioned economic slowdown. Despite an increase in this figure with the impact of COVID taking hold, the rate actually fell from 4.2% in Q1 to 4% in Q2. While this is surprising against the current landscape, the underutilisation rate is more indicative of the true impact on the labour market, increasing from 10.4% to 12% in Q2 – the largest quarterly rise recorded since 2004.
The New Zealand construction market had a strong year of growth in 2019, with a 13% increase in building activity for the year to September 2019, driven by 9% growth in residential and 16% growth in non-residential. Pre-COVID estimates put 2020 industry growth at 6%, but a seasonally-adjusted decline of 5.7% in total building volume was recorded in the March quarter, following a 0.9% fall in the previous quarter.
5.7% decline in total building volume in March quarter, following 0.9% fall in previous quarter.
Looking at the current state of the industry, many sites are working double shifts to maintain productivity levels, and encouragingly, there have been no reports of major contractual delays. Future risks, similar to all the regions we report on, will be site shutdowns, mandatory self-isolation periods and supply chain disruption – all of which will have varying degrees of impact, depending on how the coming weeks and months play out.
While New Zealand’s approach to suppressing the virus and minimising its impact has been widely commended, it has been impossible to entirely mitigate the effects and that can be seen in the economic and construction industry performance indicators. Although they are relatively moderate in comparison with other countries, it must be noted that at the time of publishing, a second wave of the virus had broken out in Auckland, and so the full extent of the impact remains to be seen.