Australia construction data backs view rates on hold

SYDNEY: Australia's construction sector grew at a slower-than-expected pace in the first quarter, as spending by the private sector contracted, backing market expectations that interest rates are on hold this year.

Government data released on Wednesday May 26 showed total construction work rose by 1.9 percent, well below economists' expectations of a 4 percent rise, but rebounding from a downwardly revised 0.2 percent fall in the fourth quarter.

The rise was mainly due to government stimulus and will feed into first-quarter gross domestic product numbers due next week. Construction makes up around 16 percent of the economy and analysts are generally expecting a pick up in growth.

"The numbers are slightly softer than expected with the public sector holding up while the private sector is slackening," said Stephen Roberts, economist at Nomura. "I expect interest rates to be on hold and have pencilled a rate hike in the fourth quarter but there are chances that will drift back further."

The Reserve Bank of Australia's (RBA) monetary-policy board meets next week. It is widely expected to keep rates on hold as the turmoil in financial markets stemming from the European debt crisis overshadows domestic factors for now.

The consensus market view is for rates to remain on hold at 4.5 percent over the next 12 months, though financial markets are not totally discounting the prospect of a rate cut on June 1, putting that at a 16 percent chance. Until recently, they had been betting on another hike.

The RBA has been one of the most aggressive central banks in withdrawing monetary stimulus, raising the cash rate by 150 basis points since last September.

OUTLOOK BRIGHT FOR CONSTRUCTION

The central bank has raised rates to prevent an asset bubble, fuelled partly by a surge in the terms of trade.

Australia has seen an upswing in construction activity helped by a mining boom and government spending. Public building was boosted by government spending on schools and housing, and there was a strong pipeline of building work worth A$58 billion.

The value of construction work done by the public sector rose 11.8 percent in the first quarter to A$12.7 billion, offsetting a lacklustre performance by the private sector where value of work done fell 2.2 percent, its third straight quarter of decline.

"Today's data reinforces our view that the public-sector side of investment is driving construction growth in the near term, before this collides with the private sector picking up in mid-2010," said George Tharenou, an economist at UBS.

One project alone is expected to start boosting the economy in coming months. The A$43 billion Gorgon liquefied natural gas project could directly contribute annually up to around 0.5 percentage points to GDP growth over the next five years.

"The outlook is extremely positive, boosted in particular by the recent commencement of the Gorgon project in Western Australia," said Julene Lee, economist at Westpac.

Economists expect the Gorgon project could be reflected in the private capital expenditure data due on Thursday.

Analysts expect a modest 1.4 percent rise in expenditure, after jumping 5.5 percent in the fourth quarter of last year. - Reuters