There is an amazing disconnect between the futures markets, which are pricing in a decline in interest rates over the next 1-2 years on the back of US weakness, and the domestic economy, which looks to be growing strongly and would suggest the RBA is going to be raising rates. Today's construction data shed crucial light on the handing over of the 'economic baton' from the public to the private sectors, which, as I described in a recent post, was a key near-term risk. To quote ANZ:
"Construction work done rose by a stronger than expected 3.5% in Q2 to be 8.3% higher in annual terms. The result was driven by a solid 7.7% rise in residential work done, and more moderate rises in non-residential construction work done (+2.6%) and engineering work done (+1.5%). Today's data could present a small upside risk to expectations for next week's Q2 GDP figures, although much still depends on the release of further partial data reads over the coming days.
The good news is that there are tentative signs from today's data that we are beginning to see a transition from public sector drivers of growth to the private sector, with the impact of the Federal Government's fiscal stimulus starting to wane. The strength in today's figures was driven primarily by the private sector, with 4.9% growth in private construction work done derived from a 4.7% boost in building work done and a 5.1% rise in engineering work done. In contrast, construction work done in the public sector rose just 0.4%, with a 7.5% rise in public building work done offset by a 3.8% fall in engineering work done.
Moreover, the state breakdown of the figures shows that much of the growth came from the mining states. Construction work done rocketed up 34.9% QoQ in the Northern Territory (albeit this follows three consecutive quarters with declines of over 20%) and 11.9% in Western Australia. The other states enjoyed more moderate growth, although Tasmania continued to see a small decline in construction work done (-0.5% QoQ).
While today's data show an acceleration in residential building activity, recent softness in housing approvals on the back of a normalisation of monetary policy suggests that private dwelling investment growth may ease over coming quarters, and add little to overall economic growth in 2011.
Nonetheless, the medium-term outlook for non-residential building investment is strong, especially in the mining sector (and despite the prospect of higher tax). Over coming quarters, engineering construction in particular is expected to make a robust contribution to growth given the substantial amount of investment in the pipeline that is yet to be completed. This will be a key feature of the acceleration in Australian economic growth to close to 4% that is expected in 2011 and 2012."
