Brace for slowdown as construction falls CONSTRUCTION has experienced more than a decade of uninterrupted growth since 2000. And that has been a primary driver of our economic growth over the period. Total building and construction work done (in national accounts terms) has been 2.3 times its 2001 level and growing at an average rate of 7.2 per cent a year, with positive contributions from dwellings, non-dwelling building and non-building construction. But that's over now. We expect declining activity over each of the next four years with a total fall of 8 per cent. But that will mask differences between sectors and regions, with an impact on regional economies. It's not all about mining but a lot of it is. Certainly, the extraordinary growth of mining investment has been the major contributor. Construction associated with mining and heavy industry has increased to 23 times the 2001 levels, an average growth rate of 30 per cent a year. And that has seen a shift in construction-related companies and workers towards the industries and regions servicing mining. Some workers operated on a fly-in, fly-out basis, others moved to the regions. We've had to feed, clothe, house, entertain and transport them. Most industries found it difficult to compete with the wages being offered. Construction costs escalated dramatically and those rises started to threaten the projects themselves. Some say the investment boom is over and we do know mining investment has started to decline and will fall further. Our view is that there won't be a collapse in investment. There is still a strong logic for major gas projects in the northwest and low-cost iron ore projects in the Pilbara. But the viability of some projects, notably coal, is under threat. However, even with the prospect of an orderly decline, we're looking at a 30 per cent reduction in mining construction over the next four years. . Many of the FIFO workers will need to be redeployed in their home markets. There will be a huge shake-up in the construction industry. Will there be enough projects to keep all these people occupied and maintain construction activity? The other major negative is government construction, as cost-cutting dominates fiscal policy. Schools building is now almost back to pre-stimulus package levels while hospital building will be sustained in work done terms until the current round of projects is completed, and will then fall sharply. On the engineering construction side, we now expect significant declines in the construction of roads, bridges, rail, harbours, water, electricity and recreation. Only telecoms expenditure will remain strong, as the NBN is rolled out. That's if it continues at this level under the next government. Total public building and construction has already fallen by about 20 per cent over the last three years and there's more to come over the next two years. I lament the logic of cash budgets that fail to depreciate long-term assets over their life and hence mitigate against infrastructure spending and visionary projects. Only the NBN is exempt. If this were done in the private sector, we couldn't borrow to fund projects and would have to save the cash before making the investment. That doesn't make sense. And now it's operating to reduce infrastructure spending at a time when productivity-enhancing infrastructure is essential to smooth the transition between growth drivers. For the construction industry, the problem is that private non-mining investment won't be enough to offset the negative impact of the decline in government and mining work. Residential building is picking up but the recovery is fragile and patchy. Only those regions where buildings are in short supply will pick up. We expect residential building to grow by only 8-10 per cent over the next four years. Total non-dwelling building will fall by 7 per cent, with the growth in commercial and industrial offset by falls in social and institutional building. Total engineering construction will decline by 20 per cent, dominated by the decline in mining and government infrastructure spending. The upshot is a 8-10 per cent drop in total construction. For the economy, that means we have to make up that ground before we start to grow. Hence the current softness in the economy. In aggregate, it's not a disaster. But the industry will contract.