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Wed June 19 2019

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Australian construction falls at steeper rate

7 Jun Construction activity in Australia has fallen at the steepest rate in six years.

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI) dropped a further 2.2 points to 40.4 in May, marking nine consecutive months of contraction. Readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease.

Ai Group head of policy Peter Burn said: "Falling building approvals are continuing to weigh on residential activity. House building conditions were particularly subdued in May on the back of the sector's sharpest fall in new orders in six and a half years. Commercial construction also continued to detract from overall industry performance, recording a tenth month of contraction. Disappointingly, the recent soft patch in engineering construction extended into May, although there were encouraging signs of some improvement in tender opportunities and the uptake of new work as more planned infrastructure projects moved through to construction.

“Nevertheless, with construction orders on a broad industry basis dropping at their steepest rate in just over four years, the overall construction downturn looks likely to continue over coming months. The industry and businesses in its supply chains will be hoping that lower official interest rates will flow through to borrowers and help turn around the recent negative trends.”

HIA economist Tom Devitt said: "The Australian PCI for May showed that activity in the residential building sector continued to contract. Uncertainty in the lead up to the federal election weighed heavily on the sector during the month. The new orders indexes for both detached houses and apartments were similarly weak in May. Housing market sentiment improved in the weeks following the federal election but it is still too soon for any improvement to translate through to activity on the ground. With major banks set to pass on most of the RBA's rate cut to borrowers, it will be interesting to note whether any post-election glee translates to a lift in new orders in June.”

The activity index in the Australian PCI® contracted more sharply in May (down 1.9 points to 39.7), while new orders also fell for a ninth consecutive month (down 5.0 points to 39.4 – its steepest rate in more than four years). This was associated with a continued decline in deliveries from suppliers (down 1.4 points to 45.0) and a further drop in employment (up 0.3 points to 39.5).

Three of the four construction sectors in the Australian PCI continued to contract in May, with only engineering construction achieving stability (up 0.4 points to 50.3). House building was the weakest performing sector, declining for a 10th straight month (down 0.4 points to 34.4), while apartment building also remained firmly in negative territory (up 2.0 points to 37.7).

Cost pressures continued for building projects in May, with the input prices index jumping 7.7 points to 69.4. Growth in wages also continued, and at a faster pace (up 5.2 points to 60.9), as difficulties sourcing skilled labour persist.

The selling prices index continued to contract in May, albeit at an easing rate of decline compared to April's six-year low (up 4.4 points to 36.2). The sizable gap between the input and selling prices indices demonstrates that profit margins are being squeezed for many businesses in the construction industry, according to the team compiling the results.

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