Australian construction sector headed for the biggest jobs slump of all

On Tuesday, Federal Treasurer Josh Frydenberg, rather than release the scheduled 2021 Federal Budget, instead gave his Ministerial Statement on the Economy to Parliament. This was, in effect, a mini budget as a holding pattern until the real budget is released in October. As expected, the forecast for the current (June) quarter was grim.

“Household consumption is expected to be around 16 per cent lower. Business investment is expected to be around 18 per cent lower with falls concentrated in the non-mining sector. Dwelling investment is also expected to be around 18 per cent lower.”

Economic consultancy, Deloitte Access Economics (DAE), identified three significant areas that will impact the speed and strength of the local recovery:

• Families and businesses have had body blows to their confidence, their income, and their wealth. This combination will lead to fewer risks being taken by households and businesses.
• The Reserve Bank has already fired all their ammunition (ie stimulus spending) and there’s nothing left in the locker for the short-to-medium term.
• Australia will likely outperform the global economy, however that global weakness may undercut the prices we receive for our resource exports (although the softer Aussie dollar, if it remains at the current level, mitigates this impact somewhat).

DAE then detail the specific hits to revenue and the rises in expenditure to arrive at a forecast of a $143 billion underlying cash deficit this year, followed by a $132 billion deficit next year. As a reference point, the Government 2019 Mid-Year Economic and Fiscal Outlook projected a $5 billion cash surplus this year and a $6 billion cash surplus next year. This amounts to $286 billion of additional government borrowings in the next two years.

Even a person with my modest economic credentials can tell you that paying back that level of debt will impact the economy for many years to come.

In times of modest overall jobs growth, the recruitment industry is kept busy via the monthly churn of people leaving one job and starting another (around 150,000 to 180,000 of these occurrences every month). However, growth in new jobs is the core driver in the profitable growth of the recruitment industry.

Between November 2012 and November 2018 new jobs growth totalled 10 per cent (1.15 million jobs) as the total number of people employed in Australia grew from 11.54 million to 12.69 million.

Jobs in Australia's Five Largest Employing Sectors, 2012 - 2018

Sector	Total jobs as of Nov 2012 (000s)	Total jobs as of Nov 2018 (000s)	Increase in jobs Nov 2012 – Nov 2018	Percentage increase
Healthcare and social assistance	1,370	1,685	315,000	23%
Construction	996	1,167	172,000	17%
Education and Training	914	1,082	168,000	18%
Professional and Technical Services	898	1,035	147,000	15%
Retail	1,220	1,272	52,000	0.4%

Source: all data is from the Department of Jobs and Small Business (formerly Department of Employment) publication Australian Jobs

This snapshot of jobs growth highlights a key reason why Hays has grown so profitability in the past decade. Hays reported that the Property and construction specialism accounted for 23 per cent of their combined Australia/New Zealand gross profit in the 2019 financial year. This was nearly twice the contribution to gross profit of their second largest specialism.

The growth of other local property and construction specialist recruiters such as Stellar Recruitment, Marble Group, Design & Build, Kingfisher Recruitment, Gough Recruitment and Aspect Personnel, has been fuelled by the same demand for skilled construction workers.

Although the restrictions of the past seven weeks did not involve shutting down the construction sector, construction employment still fell by 6.4 per cent (which was below the average across all sectors of 7.5% with Accommodation and Food Services hardest hit with a decline of 33.4%).

The Master Builders’ Association (MBA) have just issued a very sobering assessment of the short-to-medium term future for the construction sector.

Of immediate concern to the MBA (and of equal concern to the Reserve Bank and all governments, I’m sure) is its members reporting an average reduction in forward contracts of 40 per cent.

This figure points to a very, very tough next four years for the construction sector.

Residential construction had already suffered through a tough 2019, primarily due to a calamitous 22 per cent decline in apartment construction across the year.

In early February this year the MBA forecast that growth in the whole construction sector would tick over at around 1 per cent a year for the next five years.

The MBA has now issued a new forecast for the construction sector downgrading residential building numbers by 27% in 2020-21 and over 20% a year until 2024. If those forecasts are accurate it means that it will take until 2024 for home building to return to 2019 levels.

My concern would be that the slowing of immigration and the, almost certain, decline in foreign student enrolments in the next year or two, may yet prove that the MBA’s forecast for residential construction is not bearish enough.

Commercial building is predicted to decline less steeply, in percentage terms, compared to home building. The total value of new commercial building has been downgraded around 16% in 2020-21, 11.5% in 2021-22 and below ten per cent after that. In 2024, commercial building activity will still not have returned to current levels, according to the MBA forecast.

In terms of the difference between private investment and government investment in commercial building activity, the MBA commented:

The commercial building landscape is changed hugely by the crisis: private sector-led projects are likely to suffer due to the very uncertain economic backdrop.

In particular, activities like tourism, recreation and entertainment have particularly poor prospects given the combination of enforced closures, restrictions on travel as well as the reduced willingness of large numbers of consumers to engage in non-essential expenditure.

On the other hand, the public sector dominates important areas of commercial building like health and education and the short term prospects for these are much improved given that government stimulus is likely to be heavy here.

In terms of job losses the MBA concludes:

…. our high impact scenario envisages that 464,300 construction jobs could be lost as a result of COVID-19 crisis, and an additional 171,600 jobs lost in the sectors which depend on construction – a total loss in employment of 635,900.

If the MBA’s forecasts prove to be out by half (on the positive side) then the market will still be very tough for the recruitment sector.

If the MBA forecasts prove to be broadly accurate, the impact on the recruitment sector will be severe, catastrophic even.

Constructive’s rapid slide of into administration, four weeks ago, is likely to be the first of many property and construction specialist recruitment agencies that fail to survive the construction sector’s upcoming, almost certain, deep slump.

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