Australia is heading for only its fourth quarter of shrinking GDP over the past 25 years according to big US investment bank Morgan Stanley.

Unexpectedly weak quarterly construction figures - the sharpest decline in 16 years - has firmed Morgan Stanley's view that the economy shrank by 0.3 per cent in the September quarter.

The consensus view from market economists is for 0.5 per cent growth, although the construction data - and in particular the big slide in private residential building - is causing a spate of downward revisions to forecasts.

Morgan Stanley's Daniel Blake said, while dynamics are not in place for a technical recession (two consecutive quarters of negative GDP), the economy going backwards in the September would challenge the "trend growth" consensus and likely see further weakness for the Australian dollar ahead.

Current GDP growth 'overstated'

The Morgan Stanley view is a series of one-offs have boosted GDP in recent quarters.

"We have been arguing that Australia's real GDP of 3.3 per cent year-on-year feels overstated, with the sharp decline in commodity prices driving an income recession over 2014-15," Mr Blake said in a note to clients.

The one-offs cited in recent quarters include a benign cyclone season for commodity exports earlier in the year which added around 0.3 percentage points to GDP, a surprise boost to public spending - including a batch of new helicopters - adding 1 percentage point, and a solid inventory build.

"Heading into the 3Q GDP figures on December 7, our tracking estimate of -0.3 per cent would not only mark just the fourth decline in the last 100 quarters, but also bring year-on-year GDP growth back to around 2 per cent," Mr Blake added.

The key headwind remains the precipitous decline in spending in the resources sector, with construction figures showing private engineering work 36 per cent down on the same time last year.

The head of the Reserve Bank's economics unit Christopher Kent noted that the mining downturn continued to weigh on non-residential construction in both Western Australia and Queensland.

"The improved outlook for commodity prices is not likely to lead to a noticeable pick-up in mining investment," Dr Kent told the Australian Business Economists conference this week.

However, Dr Kent noted that the rise in commodity prices had at last pushed up Australia's terms of trade which would, in turn, provide a "slight tail breeze providing some support for to the growth of nominal demand."

Housing cycle has peaked

The surprise 3 per cent contraction in housing construction was very much in line with Morgan Stanley's house view that the property cycle has peaked.

"We have been out of consensus with the view that the housing cycle's growth contribution has peaked," Mr Blake noted.

"While pure dwelling investment may rise a little further over the next two-three quarters, we see a hard landing for the apartment cycle weighing on activity in the second half of next year and into 2018.

"Meanwhile, the consumer has been stretched by weak income growth and rising indebtedness, with wage inflation marking a new record low of 1.9 per cent, and retail volumes falling 0.1 per cent in 3Q16."

A negative GDP number would anchor expectations of interest rates staying on hold longer - and even more potential cuts - from the Reserve Bank.

Mr Blake said this, coupled with an expected increase in rates from the US Federal Reserve next month, meant the Australian dollar may find itself under renewed pressure.