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Thu November 15 2018

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Australia’s construction activity contracts

8 Nov Australia’s construction activity has experienced a second consecutive month of decline after 19 months of growth.

The Australian Performance of Construction Index (PCI), which is produced by Australian Industry Group and Housing Industry Association, declined by 2.9 points to 46.4 in October. Readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease. It was the sharpest rate of contraction since October 2016.

The activity index in the Australian PCI contracted sharply in October (down 7.1 points to 44.9) after moving into mild positive territory in September. This was associated with a more pronounced reduction in new orders (down 2.6 points to 44.5) while supplier deliveries fell 1.5 points to a roughly stable 50.9. Employment contracted for a third consecutive month, albeit at a slower rate (up 1.1 points to 48.0).

Ai Group head of policy Peter Burn said: "The decline in overall construction activity gathered momentum in October as the Australian PCI dropped to 46.4 with residential and commercial sectors contracting during the month. The longstanding wind-down of boom conditions in apartment building continued and was reinforced by further declines in the volume of work in the house-building sector. To date there has been an orderly retreat from boom conditions in the apartment sector but the outlook is now very sensitive to any further increases in borrowing costs and possible changes in tax policy settings.

“In contrast to conditions in residential and commercial construction, engineering construction grew further and faster (in trend terms) in October, playing an important counter-cyclical role and moderating the pace of job-loss across the broader industry. Looking ahead, conditions look more fragile than they have for some time with new orders declining further into negative territory driven by weakness in the apartment and commercial construction sectors with flat-to-steady pipelines of new work for the rest of the industry.”

Across the four construction sectors in the Australian PCI, overall levels of activity were adversely affected by a faster decline in housing-building (down 1.6 points to 44.8), commercial construction (down 1.3 points to 45.6) and apartment building (down 1.7 points to 34.4), despite continued expansion in engineering construction (up 1.2 points to 58.8).

HIA acting principal economist Geordan Murray said: "The Australian PCI provides further evidence that the residential building cycle is progressing into a mature phase. Based on current indicators, we know there is still a large volume of residential building work under way and in the pipeline. As we work through the existing pipeline there will be less new work coming in behind it. The new orders index for apartments slipped further into contractionary territory in October. New orders for detached houses recovered from last month's contraction but is merely holding ground in October. The tighter lending environment is having a direct impact on activity in the housing market.”

The input prices index remained elevated in October (down 3.7 points to 72.4), while growth in wages also continued (down 0.2 points to 60.4).

The selling prices index decreased by 6.3 points to 44.3, highlighting the strong competition between builders. The ongoing gap between the input and selling prices indices indicates that profit margins remain tight for businesses in the construction industry.

MPU

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