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Australian PCI®: Construction decline eases as house building approaches stability

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) climbed 1.3 points to 43.9 in October (2019), indicating a slight easing in the construction industry’s overall rate 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: “Activity fell for the 14th consecutive month across the Australian construction industry in October (2019). However, in what might be an early sign of the impact of recent interest rate reductions, there was an easing in the pace of decline in activity and new orders in the housing sector. Elsewhere, commercial construction activity remains subdued and concerns persist among engineering construction businesses about the current lull in infrastructure activity. This highlights the need to shore-up decision making on infrastructure projects to help inject additional stimulus across the wider construction industry,” Dr Burn said.

HIA Senior Economist, Geordan Murray, said: “The Australian PCI® shows that the pace of decline in construction has eased slightly in October (2019). The improvement in housing markets since mid-year, particularly in Sydney and Melbourne, is beginning to restore confidence. The improvement is clearly evident in the sub-indexes tracking construction activity and new orders for detached houses, but the indicators tracking the apartment sector continue to highlight that a significant contraction is underway. It will be some time before the residential building sector is once again expanding; in the meantime low interest rates will provide support,” Mr Murray said.

Australian PCI® – Key Findings for October 2019:

  • October marked a 14th consecutive month of contraction in the Australian PCI®, but at its slowest rate of decline in 15 months (up 1.3 points to 43.9).
  • The slower fall in the Australian PCI® in October (2019) reflected less pronounced reductions in activity (up 2.1 points to 41.2), new orders (up 1.6 points to 43.8) and employment (up 1.6 points to 47.8). However, the steeper rate of decline in deliveries from suppliers (down 1.0 points to 43.3) highlighted the subdued overall state of business conditions.
  • Once again, all four construction sectors in the Australian PCI® contracted in October (2019) (in trend terms), with apartment building still the weakest performing sector in a 19th straight month of decline (unchanged at 34.7 points). The house building sector’s rate of contraction (up 1.8 points to 48.2) moderated in line with the slower rate of decline in new orders.
  • Across the major project sectors, engineering construction fell for a fifth month and at its sharpest rate in six years (down 2.1 points to 36.6) while commercial construction remained in negative territory for a 15th month.
  • The input prices index in the Australian PCI® increased by 0.8 points to 65.8, with elevated energy costs and supplier price rises continuing to exert upward pressure on prices. Growth in wages also continued in October (2019) and at a faster pace (up 7.1 points to 62.9), providing further evidence that overall wages growth is lifting due to continued difficulty in sourcing skilled labour.
  • The selling prices index continued to contract in October (2019), albeit at a slower rate (up 3.6 points to 44.6), indicating that rising input prices and other costs are not, on average, being passed on to customers. This reluctance to raise prices reflects the strong competition among builders in securing work, further squeezing profit margins for businesses in the construction industry.

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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