The Future of Australian Construction Industry - Term Paper Example

A Report on the Construction Industry Economic Outlook Name Course Instructor College Date of Submission Executive Summary This report details the macroeconomic indicators and their impact on the construction industry in Australia plus the economic and statistical analysis of the construction industry. Specific attention is focused on the future expectations in the construction industry in the next five years. The microeconomics indicate declining levels in interest rates from 4.75 in June quarter of 2011 to 3.0 percent in the April quarter of 2012. Total employment growth was erratic, with varied employment results across industries along with modest net employment growth greater than 2011. In light of the above microeconomic standing, the construction activity of residential and non-residential building generally indicated a hold back with engineering construction being optimistic. The construction industry is the fourth biggest contributor to GDP in the Australian economy in addition to the key function it plays in formulating economic growth. Almost the past 5 years, in 2008-2009, the Australian construction industry experienced a somewhat decline in its yearly revenue plus its general growth owing to the Global Financial Crisis (GFC). The GFC did hold back the stable growth of this industry in Australia. However, the future of Australian construction industry seems to be brilliant. Economists are hopeful that the encouraging growth tendency in construction industry will persist. Table of Contents Executive Summary 2 1.0 Introduction 4 2.0 Microeconomic Indicators and their Impact on the Construction Industry 4 3.0 Economic and Statistical Analysis of the Construction Industry 7 4.0 The future of the Building Construction Industry 10 5.0 Conclusion 14 6.0 References List 15 1.0 Introduction This report was prepared at the request of Lake Development’s management. The report details the macroeconomic indicators and their impact on the construction industry in Australia plus the economic and statistical analysis of the construction industry. Specific attention is focused on the future expectations in the construction industry in the next five years. The construction industry as captured in this report captures activities within both the private as well as public sectors, connecting to three wide areas; residential building, non-residential building plus engineering construction. 2.0 Microeconomic Indicators and their Impact on the Construction Industry CPI went up 3.6 percent in the course of to June 2011 quarter, weighed against a 3.3 percent increase during the year to the March 2012 quarter. Price rises in the June 2011 quarter hit the uppermost level ever since the 2008 December quarter, at that time, inflation got to 3.7 percent. In September 2012 the Australian dollar exchanged at US$0.97, a record low for the year having exchanged higher than that equivalence right through the year and in 2011. The seasonally attuned Australian unemployment rate went up from 0.1 percent to 5.3 percent in August 2011 whereas RBA’s interest rate stood at 4.75 percent. The latest RBA interest rates release in the April 2013 quarter stood at 3 percent where it has been since December 2012 (ABS 2012, HIA 2012a). Source: RBA Statistics: Interest Rates The redundancy rate was stuck in the region of 5.25 percent in late 2012, even if employment expansion has been squashy and the input rate is approximated to have declined in December. Total employment growth was erratic, with varied employment results across industries along with modest net employment growth greater than 2011. This partially mirrors structural adjustment to capital boom plus the complementary soaring exchange rate. Employment was predominantly fragile in the manufacturing and agriculture, forestry and fishing industries as construction and retail trade recorded declines in employment (HIA 2012). In light of the above microeconomic standing, the residential and non-residential building generally indicated a hold back. Building in the industrial sector was influenced by the burly Australian dollar; in addition, economic doubt has by and large placed a dampener on employment impacting on office building. Retail plus warehouse construction was somewhat a little better with optimistic but sluggish growth. Building goings-on in the health sector were going up with big developments lately permitted or in progress counting the Royal Adelaide Hospital, the Comprehensive Cancer Centre in Victoria, and The Centre for Obesity, Diabetes and Cardiovascular Disease, Sydney, the New Children’s Hospital in Perth as well as the new Gold Coast Hospital. Defying the dip in non residential construction was the demand for building capital in the mining sector which goes on to draw resources from the traditional construction organisations. The building construction industry went on reflecting Australia’s ‘two speed economy’ moreover the industry was experiencing a split flanked by the traditional construction sector as well as the engineering construction sector (ACR 2012; HIA 2012). Total housing units approved went down by 0.6 percent in February 2013 following an increase over the past 12 months. On the other hand, the seasonally adjusted estimate went up by 3.1 percent in February 2013 after going down for 2 months. Private sector houses approvals remained somewhat unchanged in February 2013, having maintained the same trend over the past 5 months. The seasonally adjusted estimate for private houses went up by 0.5 percent in February 2013 following a two month increase. The value of total buildings approved rose by 0.1 percent in February 2013 having risen for 13 months. Residential building worth was up 0.3 percent and has maintained an upward trend over the past 8 months. Non-residential building value decreased by 0.3 percent having gone up over the past 3 months. The seasonally adjusted projection of total building approved shed off 3.1 percent in February 2013 after an increase of 7.0 percent in January 2013. The residential building value inched 2.5 percent up after a 1.1 percent fall in January 2013. Non-residential worth dipped by 11.0 percent after a 21.1 percent increase in January 2013 (ACIF 2012). Feb. 2013 (units) Percentage change (Jan 2013-Feb 2013) Percentage change (Feb 2012-Feb 2013) Total Dwelling units approved 13,179 -0.6 11.8 Private sector 7,473 - 0.6 Private sector dwelling minus houses 5,368 -2.4 27.8 Seasonally Adjusted Total Dwelling units approved 13,179 3.1 12.8 Private sector 7,550 0.5 2.3 Private sector dwelling minus houses 5,328 1.5 23.9 Source: ABS: Building Approvals, Australia, February 2013 `Construction sector microeconomic indicators were well lower than usual, indicating frail need for residential plus non-residential building as well as stretched credit circumstances. The worth of private sector non-residential construction approvals was well lower than usual. In the property market segment, the nationwide CBD office vacancy rate declined in the December quarter, to 7.2 percent, a little lower than its standard over the past 10 years. The rates ticked down in the quarter in Brisbane, Canberra, Melbourne as well as Perth, with the vacancy rate in Perth now at 2.5 percent, down from 7.5 percent last year. National office asset worth went up by close to 6 percent over the year to the December quarter, with values in Perth along with Sydney indicating the best growth. On the contrary, property put on the market vacancy rates increased over 2011 corresponding with the restrained trade environment encountered by vendors. This decline in the retail market has predisposed to sluggish rental growth (HIA 2012a; Jones 2013). 3.0 Economic and Statistical Analysis of the Construction Industry The relevance of an industry is considered by its donation to the economy as measured by Gross Domestic Product (GDP) along with annual revenue. The construction industry in Australia has been on the rise with a solid rate more than the last 10 years. From earnings of about $100 billion in 2008-09 to earnings of just about $300 billion in 2011-12, the industry has witnessed momentous growth. The industry is the fourth biggest contributor to GDP in the Australian economy in addition to the key function it plays in formulating economic growth. In terms of volume, the construction industry contributed 6.8 percent of GDP in 2008-09, in contrast to 7.0 percent in 2007-08. Prior to that, from the time when the Goods and Services Tax (GST) in 2000-01 was introduced, the industry had gone through seven successive years of growth as a percentage of GDP (ABS 2010). Demand as well as supply forces in the industry are determined by economic aspects that include population growth along with consumer self-confidence, variations in cash rates and price levels. Of late, government strategies touching the housing and infrastructure developments have had an influence. The accessibility of resources, including labour and required materials, as well as changes in closely related sectors, such as manufacturing, mining and agriculture, as well impact the industry (Marcus 2011). In terms of chain volume, construction work finished during 2008-09 was worth $151.3 billion, an 11.0 percent raise from the preceding financial year. The five years prior to 2008-09 recorded an upsurge of 10.1 percent and 84.2 percent in the value of work completed on building and engineering construction in that order. This inconsistency in growth rates has led to a change in the divide between building construction and engineering construction work completed in Australia. In 2004-05, building construction was at 62.5 percent of entire building activity, compared to 50.2 percent in 2008-09. Construction Work Done Value in $billions 2006-2007 2007-2008 % change 2008-2009 % change Residential building 42.9 43.2 0.7 42.9 -0.7 Non-residential building 29.3 32.0 9.2 33.0 2.9 Engineering construction 55.7 61.1 9.7 75.4 23.4 Total 128.0 136.4 6.5 151.3 11.0 Source: ABS Economic Indicators Operating profit (before tax) for the construction industry in 2008-09 was $27.6 billion, a cut of 8 percent on the preceding financial year. Overall revenue went up from $259.7 billion in 2007-08 to $266.1 billion in 2008-09, a 2.5 percent gain. Total expenditure went up from $231 billion in 2007-08 to $237.3 billion in 2008-09, going up by 2.7 percent. In 2008-09 the private sector new capital spending in the construction industry was $4.1 billion, going up by 0.4 percent on the preceding financial year. Also, spending in all industries was up by 16.9 percent in the same period. Growth in spending for the construction industry in 2008-09 was at its least growth rate ever since 2002-03, and lower than the growth rate of every one industry for the first time ever since 2005-06. The construction industry was the tenth biggest contributor to the private sector new capital spending in 2008-09 at 3.6 percent of the full amount, while the leading spending by a solitary industry was in Mining, at 33.6 percent.  Construction Industry Spending Value in billions 2006-2007 2007-2008 2008-2009 Construction 3.4 4.1 4.1 All industries 87.5 96.8 113.1 Source: ABS Economic Indicators The construction industry is among the prime employing industries in Australia. The industry employed 984,100 people, a 9.1 percent share of the entire labour force, as at the May quarter 2009. It was the fourth biggest employing industry after Retail Trade (11.2 percent), Health Care and Social Assistance (11.0 percent) along with manufacturing (9.2 percent). More than three years beginning May 2006 to May 2009, the figure of people in employment in the construction industry went up from 892,100 to 984,100 individuals, a growth of 10.3 percent. Over that period, the figure of persons in employment in all industries went up by 5.6 percent. Of the 984,100 individuals working in the construction industry, 65.4 percent were engaged in construction services, 23.5 percent in building construction, 7.1 percent in heavy and civil engineering construction whereas 3.9 percent were engaged in all-purpose construction activities, not definite. Employment by Sector Sector 2007 2008 2009 Residential building 70,000 90,000 93,000 Non-residential building 42,000 43,000 48,000 Engineering construction 74,000 60,000 70,000 Source: ABS Economic Indicators 4.0 The future of the Building Construction Industry Almost the past 5 years, in 2008-2009, the Australian construction industry experienced a somewhat decline in its yearly revenue plus its general growth owing to the Global Financial Crisis (GFC). The GFC did hold back the stable growth of this industry in Australia. Nonetheless, it did not have an effect on the Australian construction industry to the extent it affected other western countries, including the US and UK. Further, engineering construction as well as mining was not affected as considerably as building construction industry. Since 1996 to 2007, the construction industry expanded at a total value of roughly 5 percent. Construction divisions in Australia that enhanced this growth were business projects along with mining (ABS 2010). For the duration of about 3 to 4 years following the GFC, the construction industry saw a sluggish decrease in business property construction along with sales. Increase in construction material prices like steel, fuel, as well as metals as a result predisposed to increase in construction expenses. The Australian administration used up a huge sum of cash in the form of Government Stimulus Packages (GSP) to hold up construction plus other industries after the economic crisis. The construction industry statistics in 2013 appear comparatively improved than they were 5 years ago. Though, they have not transformed considerably (ACIF 2012a, HIA 2012b). Non-residential construction is gaining momentum albeit gradually and residential construction is as well showing upbeat growth tendencies. Investment in non-residential on the whole is predicted to grow up though just in line with population growth, as required structural adjustment in white collar services to activate the need for new offices is lacking. Health plus aged care investment remains burly, driven by construction of big hospitals on the Gold Coast, and Mackay, Sunshine Coast, along with Melbourne, Sydney, Perth as well as Adelaide. Residential construction is a challenge that is confusing the building industry since according to the forces of demand and supply; there is a grave shortage of dwelling units. The future looks bright in residential construction as citizens desiring new homes can have a loan at the prevailing low interest rates; though the in real sense, in many regions need remains low (ACR 2012). The latest Australian Construction Industry Forum (ACIF 2012a) Forecasts demonstrate that engineering construction is still dominated by mining, even though the international doubt regarding need for minerals is keeping activity levels at bay. ACIF still predicts a tall peak yet at the moment places it more out as watchfulness over China plus Europe moderating capital expenditure. According to Peter Barda, Executive Director for ACIF, “there are countless activities to the fore of the engineering construction sector,” ACIF October 2012 information indicates that work in bridges, ports, as well as rail will keep on to be burly (a lot of which is linked to mining). Water plus sewerage expenditure as well continue to be unexpectedly lofty given that the key expenditure on desalination vegetation has at this time ended. The construction industry has seen a substantial expansion in employment rate, in the region of 6 percent. This has assisted in employment creation. Construction take-home pay has as well got better as of 2009-2013. These aspects have absolutely enhanced the feat of the construction industry. Still, the availability of qualified work force is quite low. The qualified work force scarcity remains a disturbing matter in the industry (Jones 2013). Financial information implies that the Australian administration will use up in the region of US$ 16 billion on transforming schooling in the recent future. This creates openings for construction industry investment. The optimistic growth of the construction industry is attributed to the reality that Australia was able to shun the wave of the GFC with its GSP plus other economy-boosting policy actions Public outlay in infrastructure establishments has as well gone up appreciably augmenting the growth drive of the construction industry. Construction materials along with other construction tools will see an increase in demand owing to improvements in the construction industry. However, the mounting material costs possibly will play a vital part in attainment of most important construction undertakings by construction corporations. Materials suppliers will keep on to gradually shoot up prices in line with CPI (ACIT 2012a; HIA 2012b). Over and above labour along with input cost stress, the industry is live to the prologue of the Federal Administration’s Carbon Price System in 2012. The system in effect from 1 July 2012 will for the foremost 3 years be at a flat rate of $23/tonne, indexed at 2.5 percent per year. Starting 1 July 2015, the set price will relapse to a ‘flexible’ price system (Emissions Trading Scheme (ETS)) with a ceiling and floor. The Government has suggested that more or less 500 companies will be straightforwardly legally responsible for the carbon price. For the construction industry, the mainstream cost blow will emanate from carbon in the materials used up in construction, particularly concrete, aluminium as well as steel. It is still not clear as to what degree the Tax will have an influence on outturn construction expenses. Each solitary venture will require to be examined on its specific details, taking account of project date of commencement and cash flow, input sources and the extent to which producers will try to pass on extra overheads (ACR 2012, HIA 2012a). According to the WT Partnership’s subsidiary WT Sustainability report, Carbon & Construction, the net operational expenditure of construction will climb by around 0.35 percent to 0.70 percent owing to carbon pricing though this can simply be more illustrated by exact analysis of every one singular project. The whole impact on the construction industry is up till now unidentified especially when the Carbon Price Mechanism is being initiated in a stage when Australia’s commercial construction recuperation is sluggish (Jones 2013). Macro-assumptions Summary March 2013 Actual March 2013 Actual 5 year predicted, up to 2016 GDP % 3.6 2.7 3.3 Unemployment rate % 5.2 5.4 5.3 Labour Price Index % (annual change) 3.6 2.7 2.9 Exchange rate to US$ 1.04 0.98 0.95 Source: ACIF Macro assumptions 5.0 Conclusion The future of Australian construction industry seems to be brilliant. Economists are hopeful that the encouraging growth tendency in construction industry will persist. The outlay by Australian administration in educational sector along with public investment in construction industry has made stronger the construction industry. The housing market demonstrates signs of expansion of just about 8 percent for 2013-2014. The construction industry will generate extra employment opportunities and also put in value in terms of annual revenue to the Australian economy on the whole notably as of 2013 to 2015. The Australian government is in addition running headed for raising the accessibility of credit for the construction industry. The position of mining venture remains incredibly sturdy, with additional declarations of new projects over latest months. 6.0 References List ABS, 2010, A STATISTICAL OVERVIEW OF THE CONSTRUCTION INDUSTRY, viewed 24 April 2013, ACIF, 2012a, Forecasts Summary, viewed 22 April 2013, ACIF, 2012b, Macro Assumptions, viewed 20 April 2013, ACR, 2012, Australian Construction Industry: Past, Present, Future, viewed 19 April 2013, HIA, 2012a, Housing Affordability in SA Continues Upward Trend, viewed 25 April 2013, < http://hia.com.au/media/~/media/Files/MediaMicrosite/Media%20Releases/SA/Housing%20Affordability%20Continues%20Upward%20Trend%20SA.ashx> HIA, 2012b, Residential Building – Delicate Recovery Continues, viewed 25 April 2013, Jones, P, 2013, Positive Signs in Housing Finance, viewed 21 April, 2013, < http://www.masterbuilders.com.au/newsarticles/positive-signs-in-housing-finance> Marcus, J 2011, Security of Payment in the Australian Building and Construction Industry, 4th Edition, Thomas Reuters, AUSTRALIA Read More