Discussion Production Analysis

The economy of Australia has been growing over the years and has been performing well consistently in comparison to the other OECD countries. In 2017, as per the IMF (International Monetary Fund) data, the rate of inflation in Australia had been around 1.9% in 2017. The unemployment rate as on 2017 was low at 5.6% and is expected to further fall as predicted by the ABS or Australian Bureau of Statistics. This part of the report analyses a few of the economic indicators of Australia and checks its economic performance for the last five years and the performance of the different sectors of the construction industry.

The indicators selected are the real GDP, the growth rate of real GDP and the inflation rate. Further analysis of the construction industry and its different sectors is carried out in details. The monetary and fiscal policies undertaken over the past five years have also been studied in the following sections of this report.

Discussion  Production Analysis

Real GDP

Real GDP or real gross domestic product takes into account the final value of goods and services that is produced by a given country, in a given year, within its geographical territory of that country. Real GDP is an inflation-adjusted measure, which is expressed with respect to a given year which is kept constant and is called a base year. By keeping the base year constant, the changes that take place in the price level of the economy can be traced and this will help in providing a more accurate reflection of a country’s economic growth. To analyze the purchasing power and level of growth of an economy governments often use this measure.

The graph shows that the real GDP has been increasing consistently over the last five years in Australia. The terms of trade facing Australia had seen improvement since the late 2000s. This resulted in a constant rise in the real GDP above the level that had been forecasted. In 2012, there was a decline mining investments in response to low commodity prices. This resulted in a low level of real GDP. However, non-mining investment caught up which brought up the real GDP and it showed a constant rise. (Steven, 2016). The government lowered the prevailing rate of interest along with a depreciation of exchange rates to maintain the level.

 Data source: World Bank Data Bank, Source: Created by the author

Price Level Analysis

Real GDP Growth

            Growth rate of real GDP is the rate of growth of or change in the market value of goods and services that are produced within the geographical borders of a country in a given period of time while being adjusted to inflation. The growth rate of real GDP is adjusted for inflation and therefore it takes into consideration the purchasing power. It is broadly used as a measure of a country’s economic growth. The economy of Australia has portrayed a very consistent growth compared to the other countries in the OECD and the growth rate has been higher that the forecasted rate (“NSW Department of Industry”, 2018).The real GDP growth rate fell sharply after mid-2012 because of a fall in the commodity prices but it later recovered and has remained stable since 2014. This is because the government reacted quickly and the mining boom had a contribution in the recovery. In addition, huge portions of the exports go to China, which has enabled the country to stay free from recession. However, 2016 saw a sharp fall in the growth rate. 

Therefore, the performance of the country has beenremarkablywell over the last five years, which has been due to the prompt government action using various types of fiscal measures which comprises ofadjustment of interest rate or bringing in changes in the rate of exchange (Boons, et. al., 2013).Moreover, the country has performed remarkably and the negative impacts on the economy werelargely due to the international relations as Australia high dependence on its income from foreign trade.

Price Level Analysis

Price level changes taking place in an economy can be measured by using and tracking the change in the rate of inflation. The term inflation is explained as a rise in the existing prices of the goods and services offered by the whole economy. There are several ways to measure the rate of inflation. This report uses the method of the GDP deflator; this is a comparatively broader index for the measurement of inflation. Other methods include the Consumer Price Index (CPI) indicator and the Personal Consumption Expenditure (PCE) chain price index. (Gali, 2015 

Data source: World Bank Data Bank, Source: Created by the author

            The prevailing rate of inflation has been quite unstable in Australia over the last five years. It faced a sharp decline right after 2014 but it recovered eventually. Some amount of inflation is necessary for the economy to be functioning properly and this is why the government took additional measures to bring a rise in the inflation rate. The Australian government quickly devised policy measures, which helped to bring up the inflation rate and thus the price level. The RBA (Reserve Bank of Australia) maintained the official cash rate at 1.5% since mid-2016. As a result, the CPI was as low as to 1.9%. The RBA cautioned that low inflation might exceed the period that was previously forecast.

Fiscal Policy

Fiscal Policy

            Over the last five years, taxes in the Australian government was made to grow faster than the growth in their GDP and this lead high increases in the revenue. The fiscal strategy of the Australian government relies greatly on the optimism projections. Medium term fiscal objectives will be undertaken to achieve balanced budget in different economic cycles (McCallum, et al., 2015).

Monetary Policy

            Over the past five years, the monetary policy decisions are made and expressed in terms of the targeted cash rates. A cash rate is the overnight money market interest rate for overnight loans. Over the past five years, the cash rate has been falling and this cash rate is decided upon keeping the inflation rate in perspective the target rate of which has been 2-3 percent (Wilkins, & Wooden, 2014). The determination of the monetary policy is done by the bank while making sure that full employment, price stability, welfare and economic prosperity is maintained. 

Construction Industry Analysis

According to economists from the American Institute of Architects (AIA), Associated Builders and Contractors (ABC), and National Association of Home Builders (NAHB), the future of the construction industry looks very promising where the engineering construction sector has dominated the industry and accounts for over 10% of the GDP. The total value of the industry was over $200 billion in 2012-2013 (Lehmann, et al., 2015). This industry has three sectors:

• Engineering Construction: This was the largest sector with a share of 56% of all construction activity as per the Australian Construction Industry Forum. The engineering sector saw a huge increase worth $70 billion almost. (Khalfan&Maqsood, 2014). However, after 2014, there was a fall in this sector as a result in the mining investment. It is expected to remain as the key driver with a total turnover rising by 8.4% in 2018 and 12.6% in 2019 (Shoory, 2016). This portrays that continuous high level of work is done on rail and road projects. It is expected that a lot of support will be received from the telecommunication and other civil sectors like tunnels bridges and more.
• The commodity process have shot up in the last 6 months due to increased spending in the infrastructure in China. There are many large ongoing projects and not many multi-billion projects are expected. The mining industries have long investment cycles and other countries are also looking out to expand their resource production.
• Transport infrastructure is expected to pick up over $16 billion (Antunes& Gonzalez, 2015). There are over twenty transport projects, which are small in both number and scale in comparison to the past projects. However, it has a high demand for repairs and maintenance it pays high dividends, higher than the other sectors. Utilities related construction is also expected to boom with wind and solar projects along with water treatment, substations and gas pipelines. The downturn to this are the structural concerns and soaring electricity prices, which act like a cause for, concern. Private investment into the electricity sector has been capped using policy measures.

Non-Residential Buildings: This sector expanded by around $2 billion mainly due to large ongoing projects but the overall level of work has remained subdued in the recent years combined with low investor sentiment and high degree of risk aversion weighing down the sector. The mining boom has also played a role in the fall in the growth of the sector. However, there are growth approval data from the ABS, which predict that the non-residential sector will play a more prominent role.

The value of work done is forecasted is expected to grow by 14.6% to a value of approximately $42 billion out of this $6.9 billion comes from construction related activities due to an influx of international retailers into Australia (Zou, et al., 2013). Offices fall second in line with $6.8 billion value and this increase is a function of increase in white-collar employment. The tourism sector has also increased despite the strong Australian dollar rate and Asian tourists are the highest contributor. Asian investment is also high with over $4 billion projects under construction. Out of the $11.7 billion, $9 billion has been allocated to resort projects. In the education related construction, sector forecasts show 27.5% growth with a value of $6.2 billion while the health sector has shown healthy growth whose forecast shows a 17.9% growth (Loosemore, 2014).

Monetary Policy

• Residential Building: The demand for new housing commencements have been rising over the years due to high population growth and low rate of interest. The supply gap was filled by most jurisdiction and the soaring demand is bringing a dent to the housing shortage. Future demand is also expected to rise not only due to rise in population but also due to demand drivers from demand drivers such as foreign investors and so the shortage in supply has to be met. Forecasts predict the commencements to be around 183000 in the next five years and the outlook is mixed by sectors and across geographies (Finkel, 2015). 
•  
• As reflected by the graph, the decline in housing construction comes mostly from the apartment sector with dwelling construction falling and some jurisdictions provide an offset. Due to the housing boom, most of the demand activity arose from the apartment market and the expected fall in activity, estimated to be around 6.6% would come from this sector. There is high demand for renovations as the market faces healthy price growth and cheap credit and it is expected to grow by 1.3% if prices do not fall considerably(Gregory and Smith, 2016). A considerable fall in foreign investors is expected in the next few years because of the federal and state government actions to tighten the restrictions on foreign property investors.

 In Australia, the construction industry has a value of around $112 billion annually and contributes to the GDP growth by 9%. According to the Australian Constructors Association, there had been a 10% fall in 2015 and recovered by 5.2% in 2017. The forecast for 2018 is a 9.3% rise and an 8% rise in 2019 (Ball, 2014).  This rise will come from the road, rail, civil and telecommunication infrastructure. Commercial construction activities, which had contracted in 2017, is expected to rise in 2018 to 7.8% (Australian Constructors Association, 2018).

A decrease is expected in the residential sector in 2019 but with the mining investment, the decline rate will be easing out. The overall increase in the sector will lead to higher workload and investment demand and therefore the workforce will expand. This expansion is expected to result in a rise in the total employment by 2.9% in 2018 and 2.7% in 2019 as per the recent Australian Bureau of Statistics Labour Force Survey data.

 Conclusion

            In conclusion, it has been seen that the performance of the Australian economy has been remarkable over the past five years and this credit should be given to the mining industry and other related industries. There has been low and a controlled level of inflation, which has been steady over the years. In case of any future shocks that might arise, it can be said by looking at the country’s performance that the strong and efficient monetary and fiscal policies that the country adopts will enable it to adapt quickly. The construction sector is growing with maximum growth seen in the engineering sector followed by the non-residential sector. The residential sector has witnessed a slowdown due to the housing crisis and greater decline has been predicted. After analyzing the indicators and the construction industry it can be predicted that, the Australian economy will flourish in the near future.

Part 2 Introduction

            The building and construction industry in Australia is the second largest contributing to 8.1% of the GDP and creating 8.9% increase in the employment as per the analysis of the Australian Bureau of Statistics. The engineering construction sector hold the highest share in this industry driven by investment in its transport projects and therefore it should be considered as a more neutral contributor into the country’s economy. Coastwide is an eminent company providing mechanical engineering services.

Construction Industry Analysis

Executive Summary

This part of the report analyzes the engineering construction sector of the construction industry in comparison to the all the other sectors. It is the largest sector of the construction industry and this sector has shown consistent growth and has also received funds from foreign investors. It is aimed at providing Coastwide a sector to invest in also projects where the company could get opportunities for growth and expansion. Its ends with a suggestion of an ideal project best fit for the company.

Analysis of the Engineering Construction Sector

            According to various studies, the forecasted growth in the engineering construction sector is high and has been expected to increase. Performance of this sector had seen a fall due to prices in the mining sector. According to the ABS, $187 billion was the value of the total construction work done in 2016, reflecting a decline of 4% compared to $195 billion the previous year. The building work increased by 7.5% but the engineering work decreased by 15% (Australian Constructors Association 2018). However, during the mining boom the total value of the construction was $211 billion where the share of engineering was 60% (Steven, 2016). Therefore, it is expected that the engineering sector would come up after increased investment. The previous quarter wise trend has been given by the chart below. 

According to surveys conducted by the ABS, out of the three sectors of the construction industry, the growth prospects of the engineering sector is the highest. The residential sector has been facing sharp increases too but the engineering gained a momentum that made this sector excel faster than the other fields and show a brighter future growth path. It has a major project, the $61 billion Gorgon LNG project, which is coming to an end. New projects like the $45 billion Ichthys LNG, which involves the development of a gas facility and condensate, field installation. The $34 billion Wheatstone LNG project also aims at making a liquid petroleum production sector.

This initiative was taken to aid production of gas within the country. Finally, a $75 billion Transport Infrastructure program will follow it as per data from the Reserve Bank of Australia, which will be brought in by the Coalition government focused toward the building of communities, reduction of traffic congestion by connecting cities and boosting productivity. These liquid natural petroleum projects and transport sector projects are attracting huge investments in the engineering sector. The transport sector looks very promising and is expected to be facing a boom. In the utilities related sector there are over 20 projects lined up which is attracting investments worth billions which would help in growth.

Part 2 Introduction

Over the years the transport and utilities projects have been areas for long term investment. The two LNG projects that are in line are expected to give Qatar a competition in the production of liquid petroleum. Additionally investment in transport has been a crucial part of the government’s strategy over the years in order to make rural roads safe and efficient. Transport infrastructure has been expected to see a huge rise in the near future with investment hitting $16 billion in the next 3 years as per a prediction by Deloitte Access Economics Investment Monitor. Thus, Coastwide should invest in the transport sector to grow as this sector is and has the potential to grow. By investing in a sector, which is growing, the company will have high prospects to grow.

Government Measures

            Several measures have been taken by the government to promote the construction industry. The Australian Building and Construction Commission aid massive gains in the construction industry productivity, which is beneficial to the workers. They are addressing the issue of faulty materials as well through the Building Ministers Forum and the Australian Building Codes Board also national licensing promote gains in productivity (Schneider, 2013).

Conclusion

Therefore, to sum up, the Australian economy has witnessed significant growth and a lot of contribution to this growth has come from the construction industry. The construction industry did face a few lags in the growth of a few of its sectors for several reasons like the housing crisis which affected the residential sector the changes in the mining industry which had its impact on the engineering sector to name a few. However, despite all these slowdowns in growth, the different sectors have witnessed increasing growth especially in the engineering and residential sectors but the engineering sector’s growth surpassed that of the other sectors. On analyzing the growth and its direction, it is advisable for Coastwide to work in the engineering sector to reap gains from its production. There are many promising projects in the engineering construction sector like in the fields of utilities, transport, development and more. Out of the three projects mentioned in the report, the Ichthys Liquid Natural Gas project, which is worth $45 billion, seems most prospective for the company and its growth goals.

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