The latest State of the States report from CommSec highlights the current importance of residential construction to the health of the Queensland economy. As reported by John McCarthy in today’s Courier-Mail:
QUEENSLAND’S economy is starting to emerge from the mining downturn and is creeping back up the national rankings, according to CommSec.
The state sits in fifth spot, behind Tasmania in fourth, but CommSec said people were starting to move to Queensland, driving up the population and creating housing demand…
…Population growth in Queensland was running at 1.3 per cent, its best for two years and that is helping the jump in home starts, which is 36 per cent above the decade average….
… “The strong level of home building will support the job market, as well as consumer and business spending,’’ the CommSec report said.
While the residential construction sector is currently performing strongly, I am concerned about how long this will last, particularly given the huge increases in supply, most notably of apartments, that we are seeing. The very large amount of residential construction work in the pipeline most likely peaked toward the end of last year (see first chart below) and building approvals, particularly for apartments, declined over 2016 (see second chart below). Peter Faulkner noted in a recent post that “we continue to see the dramatic impact of the decline in unit approvals being felt disproportionately in Greater Brisbane.”
I expect we will see residential construction activity fall toward the end of 2017, so it will no longer be making a positive contribution to economic growth. By this time, non-residential construction activity should start to pick up, with major projects such as Queen’s Wharf making a large contribution, but they may not be sufficient to make up for the expected decline in residential construction.
That said, the outlook for the Queensland economy in 2017 is generally positive, and I have previously commented on the increase in job vacancies we saw at the end of 2016 (see my recent post), solid growth in retail spending (related in part to a resurgence in tourism), and the rebound in commodity prices, particularly for coking coal (see chart below), which has improved the outlook for coal mining and led to the re-opening of the Glencore mine at Collinsville in North Queensland.
How long the coal price rebound lasts is very difficult to forecast. The Office of the Chief Economist in the Australian Department of Industry, Innovation and Science is not getting its hopes up, noting in its latest Resources and Energy Quarterly that:
“…prices are forecast to decline over the outlook period, as China’s metallurgical coal import demand stabilizes. Global metallurgical coal producers have been increasing production in response to higher prices, and China has now eased domestic supply-side policy measures in order to bring prices down.”
So we should not expect the very high coal prices to be sustained, and to turbo-charge the Queensland economy and repair the State Budget, but we can enjoy the benefits of higher prices while they last.
What I expect will provide a more enduring boost to the Queensland economy is tourism. The Australian dollar is in a range (chart below) that has greatly increased our attractiveness as a tourism destination, and the dollar may well fall further, given the possibility of a Trump-inspired economic boom in the US and higher US interest rates. In the 12 months to September 2016, international tourism visitor expenditure in Queensland increased nearly 11 percent to over $5 billion (see International Tourism Snapshot from TEQ). I expect tourism to also grow strongly in 2017, and, all going well, its growth should offset any contractionary forces arising at the end of 2017 from residential construction coming off its recent extremely high levels of activity.