Australia economic and construction review
The year 2020 began with the ‘Black Summer’ bushfires at their peak, before COVID-19 brought about an entirely new set of challenges for Australia. As the country continues to suppress the virus, John Carleton, Director – Australia and New Zealand at Linesight, reviews the economic and construction industry performance for the year, and what we can expect in 2021.
The COVID-19 pandemic made its presence felt worldwide in 2020, and Australia was no exception, recording its first recession in almost 30 years and the sharpest fall in GDP on record, with a 7% decline in the June 2020 quarter. The September quarter saw a recovery, with 3.3% growth. This was ahead of the market forecast of 2.6% and the greatest increase since 1976. This was followed by further growth of 3.1% in the December quarter. This is largely attributable to the reduced numbers of COVID-19 cases, followed by easing of social distancing and other restrictions across the country. While COVID-19 cases remained low in most of the states and territories, Victoria was not so fortunate. The state implemented stage 4 restrictions in August, which remained in effect until late October.
Household spending rebounded quickly and saw a significant uplift of 4.3% in the December quarter, as cases reduced and restrictions eased. Private business investment rebounded by 3.9% in the same quarter. As Victoria reopened, it provided a boost, as did the AU$7 billion tax cuts, AU$850 million JobMaker credits and the AU$1.5 billion investment incentives.
Ultimately, economic activity remained lower in comparison to pre-COVID times, and there was a decline of 3.8% on an annual basis through 2020 to the September quarter
In terms of inflation, the Consumer Price Index (CPI) recorded a 0.9% rise year-on-year in the December quarter, and a 0.9% rise on the previous quarter.
Unemployment continues to fall, hitting5.8% in February, down from 6.4% in January. This was spurred on by the second round of central bank stimuli, as well as planned Government spending, aimed at supporting recovery and employment. However, it should be noted that Victoria’s second lockdown somewhat tempered the recovery statistics.
Total construction output decreased by 1.4% through the year (December 2019 to December 2020) and declined by 0.9% quarter-on-quarter in December 2020, following a 2.6% fall in the September quarter. Despite construction being classified as an essential service, allowing the vast majority of organisations in the industry (94%) to continue operating, the pandemic has undoubtedly taken its toll. Maintaining the pipeline for the foreseeable future and securing jobs in the industry remain the focus for stakeholders.
Value of work done recorded mixed results between categories as follows across the year:
- Residential: 2.7%
- Non-residential: -2.4%
- Building: 0.6%
- Engineering: -2.8%
Looking at specific sectors, data centers in Australia mirrored the global trend, with Gartner predicting a 10.4% drop in investment in data center infrastructure in 2020 in October. This can be attributed to a number of Australian businesses delaying their CAPEX-intensive infrastructure refresh and upgrades, in an effort to contain costs with the current economic landscape, with increasing consideration for these types of businesses to take an 'as-a-service' model approach. This has been reflected in the colocation space in Australia which has been less impacted by COVID, with planned construction continuing and uptake of existing infrastructure growing. And as detailed below in our look ahead, we expect growth in the sector in 2021.
In terms of residential, the number of dwelling units approved in Australia increased by 10.9% month-on-month in December 2020. This is as result of the federal and state housing stimulus, combined with low-interest rates. Private sector housing increases of 15.8% were recorded in December 2020 versus 6.6% in November, while private sector dwellings, excluding houses, recovered well from a 2.6% decline in November to 2.3% growth in December.
The Australian Government has committed to new and accelerated infrastructure spending, announcing in mid-2020 that 15 infrastructure projects valued at AU$72 billion would be fast-tracked, providing much-needed support for circa 60,000 direct and indirect jobs. This was followed by an announcement of plans to spend AU$7.5 billion on nationwide transport infrastructure projects, which brings the full spend committed by the federal government towards infrastructure projects for the next four years to AU$14 billion. Plans include road and rail i projects, the First Home Loan Deposit Scheme, the HomeBuilder program and the upgrade to the National Broadband Network. This is further supported by an agreement to cut approval times for infrastructure projects by 50%.
Other sectors performing well include health and education, which are largely driven by public spending, and industrial and logistics, which has benefited from an uptick in private investment as retailers continue to reposition their businesses to service the online market.
Construction industry employment stood at 1.182 million as of December 2020, up from 1.176 as of September 2020. The industry accounted for 9.6% of total employment across the Australian economy at the end of 2019-20.
In its economic outlook within the Statement of Monetary Policy in February 2021, the Reserve Bank of Australia forecast a rebound in GDP and employment over the course of 2021 to their pre-pandemic levels. This is between six and 12 months earlier than previously anticipated. Unemployment is thought to have peaked and is now on a steady downward trajectory, projected to hit around 5.25% by mid-2023. Under the baseline scenario of no further resurgences of the virus and subsequent severe lockdowns, it is expected that GDP will grow by approximately 3.5% over both 2021 and 2022, with inflation expected to pick up to stand at around 1.75% by 2023.
In terms of construction, there are some key areas that are performing well and experiencing increased demand, with an acceleration in e-commerce, as well as the reshaping and improvement of supply chains. Sector-wise, Gartner is projecting a 6.5% increase in investment in data center infrastructure in 2021, amounting to a $3 billion spend, which is in line with the forecasted global growth in the sector of 6%.
Solid growth and resilience are expected in industrial and other commercial building and the value of work done this year is projected to grow by between four to six per cent. The abovementioned levels of Government spending in infrastructure also bodes well for the industry.
However, the Australian Construction Industry Forum (ACIF) anticipates a 3.2% reduction in work completed in the 2020-2021 period. This will drive the loss of 42,000 jobs in construction, primarily in Victoria, New South Wales and Queensland.
Sectors that have been directly affected by lockdown measures are expected to face the largest declines:
- Accommodation: -34%
- Entertainment and recreation: -23%
- Retail and wholesale trade: -17%
- Education: -11%
- Health and aged care: -4%
Ultimately, there is a sense of cautious optimism, as recovery is on the horizon, with a rebound in 2021-22 expected, amounting to a 2.3% (AU$230 billion) increase in work. An eventual upturn in residential building and engineering construction will drive the recovery.
Contributors: John Carleton and Albena Spasova