General Economic Information

The past 3 months has seen activity levels in the Construction industry (and the Australian Economy as a whole) slow substantially as the impact of the Global Financial Crisis is compounded by fears of a World-wide Recession.

Demand for Labour has weakened significantly since our last update, with the latest figures showing skilled unemployment reaching its lowest level in 15 years.  Unemployment is tipped to rise from 4.3% to 5% by the middle of 2009 - somewhere in the order of 200,000 extra people out of work in the next 6-9 months.

On the upside, the majority of economists are still predicting that economic growth in Australia will only moderate over the next 12 months rather than contract.  This means Economic Growth dropping to 2.3% in 2009 - making Australia one of the best performing economies in the world - so we are well placed to ride out this period of economic uncertainty.

Another positive is the coordinated and decisive action taken by both Governments and Central Banks around the world to stimulate economic activity and temper the effects of the global slowdown.  These actions have demonstrated a clear statement of intent by World Leaders to avert the worst-case scenario.  The effects of these coordinated efforts are only just starting to have an impact, however it will be several months before the overall effect can be ascertained.

The Reserve Bank of Australia is also likely to continue cutting interest rates over the coming months.  Most economists are expecting a 50 basis point cut in November (although there is a possibility that this could be as little as 25 basis points).  The longer term forecast is for interest rates to be cut to 4.25 - 4.5% by mid 2009 - providing a significant stimulus to the economy.


Are we in for a 1990 Style Recession?

One of the key features of the early 90’s recession was extremely high debt levels in the corporate sector leading to severe problems including high levels of bankruptcy.  This high corporate debt level, coupled with very high interest rates triggered a major decrease in business investment that pushed economic growth significantly lower and led to very high unemployment.

At this stage corporate debt levels, particularly when looked at on a Net Debt to Profit ratio, are much more manageable.  The cost of servicing debt should actually decrease over the next year, due to falling interest rates (once the credit markets start functioning more normally).  Net Debt to Profit ratios at present are below the 2001 peak and well below the peak in the early 90’s.  In addition to this the lower Australian Dollar, coupled with the stimulus packages announced by the Government should help moderate any negative impact of the Financial Crisis.

With regards to corporate bankruptcy, the rate of this is rising, although relatively moderately.  In fact the rate of corporate bankruptcy is well below the peak in 2000 (GST related) and the 1990 (recession) peak.  At this stage even an historic collapse in economy wide profits will not lead to the burden of corporate debt becoming concerning.


Sydney Employment Market

The pace of the slow down has increased since the start of September, with positions listed in Sydney falling 25% since the last update.  We have also seen a number of medium to large sized practices downsizing, with the possibility of more to come.

The composition of positions listed has changed significantly over the past 6 months.  The majority of demand in the Architectural sector is for mid-level Architects with strong broadly based skills.  Positions for Senior Architects, Graduate Architects and Documentation personnel are in short supply.  With regards to the Interiors sector, demand is more broadly based with practices working in the Hospitality and Retail sector still seeking quality personnel.

At this stage we expect the road through to Christmas to remain rocky, however indications for 2009 remain positive despite an underperforming New South Wales economy.  Some practices are even reporting an increase in activity as developers seek to push projects through to capitalise on the expected fall in construction costs in the first half of next year and significantly lower interest rates.

The pace of development pick up in New South Wales may well be at a lower level that other states due to the significant development levies that continue to be imposed by the State Government.