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Australian Construction Industry Forum Construction Forecasting Council CFC cfc.acif.au 16th Forecast May 2009

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Australian Construction Industry Forum Construction Forecasting Council CFC cfc.acif.au 16th Forecast May 2009

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    1. Australian Construction Industry Forum Construction Forecasting Council (CFC) www.cfc.acif.com.au 16th Forecast May 2009

    2. Outline Forecasting Backdrop Recent Developments Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    3. CFC project Forecasting construction to improve the industry’s knowledge base 1st CFC forecasts were published March 2002. CFC forecasts are updated half-yearly and published free on: www.cfc.acif.com.au The 16th CFC forecasts begin from 2009Q1 Three broad construction sectors: residential building non-residential building engineering construction

    4. 20 Construction types

    5. Nature of Forecasts We forecast ABS data so the accuracy of the forecasts is readily checkable from credible, published data stage: approvals -> commencements -> work done -> completions seasonality: original / seasonally adjusted / trend nominal or real: values / chain volume

    6. 4 Elements to Forecast Work Done

    7. Mean Lags – Residential Building

    8. Mean Lags – Non-res Building

    9. Mean Lags – Engineering

    10. Macro Assumptions latest in 12 months 10 years Wage inflation 4.8 (to 08Q4) 1.5 4.2 Unemployment 5.4 (Apr 09) 7.4 5.4 CPI inflation 2.5 (to 09Q1) 0.0 2.6 GDP (rolling year) 2.1 (to 08Q4) -1.7 3.0 Cash rate 3.0 (May 09) 2.75 5.0 10-year bond 5.4 (May 09) 4.6 5.5 $A (US cents) 78 (May 09) 63 62 The GFC has sent Australia into recession with other advanced economies. We expect 4 negative quarters of GDP growth. Unemployment is set to peak at over 8% in 2010-11.

    11. Industry Investment, $bn/yr

    12. Track Record: Residential, $bn

    13. Non-residential, $bn

    14. Engineering, $bn

    15. Outline Forecasting Backdrop Recent Developments Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    16. Recent Developments: Forecasts

    17. Approvals – non-res ($bn nom sa)

    18. Approvals – residential ($bn nom sa)

    19. Eng Commencements ($bn nom sa)

    20. Federal Budget

    21. Recent Developments: Summary

    22. Outline Forecasting Backdrop Track Record Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    23. Real Activity, $bn/year, 06/07 prices

    24. Price Indexes, 2006-07 = 1

    25. Nominal Activity, $bn/year

    26. Nominal Activity, annual % change

    27. Construction Employment (‘000)

    28. Outline Forecasting Backdrop Track Record Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    29. Population, average annual growth

    30. New Houses, $bn per year

    31. Units & Townhouses, $bn per year

    32. Large Alterations & Additions, $bn/yr

    33. Small Alterations & Additions, $bn/yr

    34. Annual Growth Rates

    35. Residential - Larger States, $bn/yr

    36. Residential Starts (‘000) rest of NSW and rest of QLD has been rising v strong in recent years, hence strong growth in 'rest of Aust.' rest of NSW and rest of QLD has been rising v strong in recent years, hence strong growth in 'rest of Aust.'

    37. CFC vs HIA, Starts (‘000)

    38. Residential Building Conclusions Residential building approvals have continued to slide. After falling by 17.6% in the December quarter 2008, approvals were down a further 16.4% in the March quarter 2009. All categories have fallen. Alterations and additions are holding up the best but have still gone backwards. The investor sensitive unit/townhouse market has almost halved in the last 6 months House approvals have fallen by more than a quarter since September quarter 2008 In 08/09, and 09/10 residential building is forecast to fall in real terms, before rebounding strongly in 10/11. Rising unemployment will reduce households’ capacity borrow and thus will hold back growth in residential building Lower interest rates are giving glimmers of hope but there will be no strong turnaround until commercial developers can re-enter the market (house price growth will need to improve)

    39. Outline Forecasting Backdrop Track Record Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    40. Retail/Wholesale Trade, $bn/yr

    41. Retail, Starts ‘000 sqm

    42. Offices, $bn/yr

    43. Offices, Starts ‘000 sqm

    44. Industrial, $bn/yr

    45. Industrial, Starts ‘000 sqm

    46. Educational, $bn/yr Hilton refurbishment in Sydney in Dec qtr 2004Hilton refurbishment in Sydney in Dec qtr 2004

    47. Educational, Starts ‘000 sqm

    48. Health & Aged Care, $bn/yr

    49. Accommodation, $bn/yr

    50. Annual Growth Rates Non-residential building then fell to a low level. It has since recovered to a normal level, because interest rates have been low and economic growth has been strong. Non-residential building is forecast to remain stable, at a normal level over the short term. 2002/03 2003/04 2004/05 $13,619m $13,876m $14,288m 4% 2% 3% The seasonally adjusted non-residential building work done series shows the outlook for non-residential building without the seasonal variations. Non-residential building then fell to a low level. It has since recovered to a normal level, because interest rates have been low and economic growth has been strong. Non-residential building is forecast to remain stable, at a normal level over the short term. 2002/03 2003/04 2004/05 $13,619m $13,876m $14,288m 4% 2% 3% The seasonally adjusted non-residential building work done series shows the outlook for non-residential building without the seasonal variations.

    51. Larger Capital Cities, $bn per year Sydney: Non-residential building in Sydney rose to a very high level leading up to the Olympics. It then fell to a low level, due to the oversupply of certain non-residential building types, such as hotels. Non-residential building has begun to recover in Sydney. It is forecast to rise to a normal level over the short term. Melbourne: Non-residential building in Melbourne is forecast to ease back to a normal level, around $3 billion each year over the medium term. Non-residential building is forecast to remain stable in other state capital cities. Sydney: Non-residential building in Sydney rose to a very high level leading up to the Olympics. It then fell to a low level, due to the oversupply of certain non-residential building types, such as hotels. Non-residential building has begun to recover in Sydney. It is forecast to rise to a normal level over the short term. Melbourne: Non-residential building in Melbourne is forecast to ease back to a normal level, around $3 billion each year over the medium term. Non-residential building is forecast to remain stable in other state capital cities.

    52. Non-Res Building Conclusions Analysis of the latest building approvals numbers show non-res activity in the private sector is still falling solid public sector figures hiding further weakness in March quarter 2009 in private sector approvals commercial developers still finding it difficult to borrow due to the GFC and declining asset values pushing up gearing ratios No strong recovery expected over the forecast horizon total non-residential building to be very weak, especially 09/10 (nominal terms) due to retail, office and industrial construction collapsing due to deferred and cancelled REIT projects government spending on education and health will only slightly cushion the sector

    53. Outline Forecasting Backdrop Track Record Overview of Forecasts Residential Building Non-Residential Building Engineering Construction

    54. Forecast major engineering starts project type target start value ($bn) Kestrel Coal mine extn QLD mining 09Q2 1.4 Boddington Gold exp WA mining 09Q2 2.8 Rapid Growth iron ore 4 WA mining 10Q3 1.7 Budget Measures (value is figure for federal govt funding) Regional Rail Express Vic Rail 09Q2 3.2 Gawler & Seaford extns SA Rail 09Q2 0.6 Clean Energy Initiatives Electricity ?? 3.5 Hunter expwy / Kempsey NSW Road 09Q2 2.0 Ipswich Motorway Qld Road 09Q2 0.9

    55. Infrastructure Announcements – Budget

    56. Roads, $bn/yr Mitcham-Frankston tollway commenced 2005Q1, valued at $2.5bMitcham-Frankston tollway commenced 2005Q1, valued at $2.5b

    57. Bridges, railways, harbours, $bn/yr

    58. Electricity, pipelines, $bn/yr

    59. Water & Sewerage, $bn/yr

    60. Telecommunications, $bn/yr

    61. Heavy industry incl. mining, $bn/yr

    62. Annual Growth Rates

    63. Larger States, $bn/yr Sydney: Non-residential building in Sydney rose to a very high level leading up to the Olympics. It then fell to a low level, due to the oversupply of certain non-residential building types, such as hotels. Non-residential building has begun to recover in Sydney. It is forecast to rise to a normal level over the short term. Melbourne: Non-residential building in Melbourne is forecast to ease back to a normal level, around $3 billion each year over the medium term. Non-residential building is forecast to remain stable in other state capital cities. Sydney: Non-residential building in Sydney rose to a very high level leading up to the Olympics. It then fell to a low level, due to the oversupply of certain non-residential building types, such as hotels. Non-residential building has begun to recover in Sydney. It is forecast to rise to a normal level over the short term. Melbourne: Non-residential building in Melbourne is forecast to ease back to a normal level, around $3 billion each year over the medium term. Non-residential building is forecast to remain stable in other state capital cities.

    64. Engineering Const’n Conclusions Despite the onset of the GFC, long project lags mean that the major economic downturn will not be felt in the Engineering sector until 2010-11 latest work done figures support solid pipeline story Budget announcements welcome but only $3bn new money for carbon storage facilities and solar power plants Most projects to be funded out of Building Australia Fund, which has already been accounted for in previous rounds not clear when NBN construction will begin mining construction forecast to be down by more than half in 2010/11

    65. 16th Forecast: General Conclusions Residential building appears to be very weak, with approvals lower across the board. Rising unemployment will hold back recovery even with very low interest rates. Recovery to commence in 2010/11 as employment recovers and housing shortage supply effects begin to dominate Non-residential building is forecast to be extremely weak during 2009/10. Approvals have fallen further in the March quarter 2009, and will only be partly offset by government funded education and health projects Engineering construction has received a solid boost from Budget announcements around electricity, roads, rail and the NBN which should prevent a collapse of the sector before the next economic upswing

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