Figures from the Australian Industry Group in conjunction with the Housing Industry Association remained in the red in May, down 0.2 points to 34.7. Australian Performance of Construction Index (Australian PCI) readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease.
By sector, commercial construction registered the sharpest fall in more than three years coinciding with a further weakening in new orders. House and apartment building activity continued to contract substantially. Despite declining in the month, engineering construction contracted at the slowest rate of all sectors reflecting the strength of resource-related projects.
Australian Industry Group chief economist Julie Toth said: "The Australian PCI remains deeply entrenched in negative territory. The index continues to reflect the cyclical downturn in residential housing activity as well as the downturn in non-residential building and construction, outside the mining sector. While the two consecutive cash rate cuts from the RBA in May and June are very welcome and will help to improve sentiment among home builders and investors, it will take some time for this benefit to flow through to actual construction activity levels. In the meantime, the forward indicators such as building and credit application approvals all point to a further period of extended weakness in construction activity levels from here."
Housing Industry Association senior economist Andrew Harvey said: "The Australian PCI for May shows that house building activity has now contracted in every single month of a full two year period, and new orders suggest we have further to go before residential building activity hits bottom. Interest rates are now moving in the right direction, but with consumer and business confidence at low levels it will likely require fiscal stimulus to get new home building, not to mention much of the non-resource economy, out of the current weak position.
The Australian PCI has now been in negative territory for two years. Weak demand, difficulties in obtaining finance, project delays and intense competition to secure new work were the main factors cited by respondents as undermining activity in the industry.
Reflecting the continued lack of new business, the new orders sub-index contracted for the 24th straight month in May - recording 33.7, only a slight improvement on the previous month.
Falling activity and attempts to reduce costs saw employment again contract at a sharp rate (38.4).