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Modest easing in construction downturn

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 0.7 points to 43.8 in February 2019, indicating a slightly slower rate of decline for the construction industry on aggregate (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: “Australia’s construction downturn continued in February (2019) with activity falling in all four sub-sectors and employment levels contracting. The downturn is most acute in the residential sub-sectors while both engineering and commercial construction also contracted again in February (2019). In large part, the drop in residential activity is a further and to-date orderly wind-back from the historically high levels of activity. The fall in engineering construction is shallower and less entrenched than is the case with the residential sub-sectors but is also a pull-back from elevated levels. With new orders also lower in February (2019) the construction downturn looks likely to continue over coming months. On the positive side, there is clearly capacity to lift construction activity if policy makers are looking to stimulate the slowing economy,” Dr Burn said.

HIA Economist, Tom Devitt, said: “In 2018, market confidence fell away as dwelling prices corrected. Investors and owner occupiers are delaying purchase decisions as the credit squeeze plays out and interest from foreign investors has waned. The Australian PCI® shows the housing market downturn accelerated in the second half of 2018. Across detached houses and apartments, activity is contracting and so too are new orders. The pipeline of building work looks to be shrinking at a concerning rate. Residential building has been pivotal in driving activity in the rest of the economy for the past five years. Over the coming years as home building activity slows the sector will be reliant on the resilience of the broader economy,” Mr Devitt said.

Australian PCI® – Key Findings for February 2019:

  • A slightly milder decline in the Australian PCI® in February 2019 (up 0.7 points to 43.8) reflected less pronounced reductions in activity (up 2.2 points to 41.6) and employment (up 1.6 points to 46.0). However, both new orders (down 0.9 points to 43.2) and deliveries from suppliers (down 1.1 points to 45.4) contracted at slightly steeper rates, with businesses attributing this to overall sluggish demand conditions.
  • All four construction sectors in the Australian PCI® contracted in February 2019, with continued weakness in the house (down 0.6 points to 35.2) and apartment (up 0.2 points to 28.6) building sectors. Commercial construction fell further into negative territory (down 1.2 points to 42.2) while engineering construction declined for a third month (down 1.4 points to 43.9) due to a shallower pool of new work to replace completed and more advanced projects.
  • The input prices index moderated somewhat but remained elevated in February 2019 (down 5.9 points to 68.7), with cost pressures related to the strength of commodity prices adding to high energy costs. Growth in wages also slowed (down 4.1 points to 59.6) but continues to provide evidence that difficulty in sourcing skilled workers is keeping overall wage growth relatively high.
  • The selling prices index continued to contract in February 2019, and at a sharper rate (down 3.5 points to 40.7), with the ongoing gap between the input and selling prices indices demonstrating that profit margins remain tight across the construction industry in a highly competitive quoting and tendering environment.

Background: The Ai Group/HIA Australian PCI® is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. An Australian PCI® reading above 50 points indicates that construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.

Source: Ai Group

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