Regional Analysis 2020 Australia and New Zealand

Australia Market Review

As we near the final quarter of 2020 and begin to realise the 'new normal’ of COVID-19, John Carleton, Director – Australia and New Zealand at Linesight, reviews the Australian economic and construction industry performances to date, and what we can expect in the coming months. 

Economic overview

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: 

• Australia closed its borders  
• The ASX 200 lost a third of its value and the Australian stock market fell by 9.7% in one day (16th March) – the largest one-day fall since 1987 
• Three fiscal stimulus packages totalling AU$213.6 billion had been implemented by the Federal Government 
• The Royal Bank of Australia reduced the cash rate to 0.25% - an all-time low 
• Social distancing was implemented, with the Australian Government stating that no more than two people may be together in public 

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.  

Labour market

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%. 

Construction

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. 

Summary

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.