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Construction industry contracts at slower pace in June 2020

Construction industry contracts

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) rose by 10.6 points to 35.5 in June (2020), indicating that business conditions remained negative across the construction industry but the pace of contraction eased from the record lows experienced since March (2020) (readings below 50 indicate contraction in activity, with lower results indicating a faster contraction).

All four sectors included in the Australian PCI® reported increases in customer queries and requests for quotes in June (2020) but these are not yet translating into solid commitments for future work, with the new orders index improving from recent lows but still firmly negative at 32.8 points.

Ai Group Head of Policy, Peter Burn, said: “While continuing to contract, the pace of decline in the construction sector eased in June (2020) following the sharp falls in April (2020) and May (2020) when activity levels and new orders collapsed in the wake of restrictions and heightened uncertainty. Nevertheless, construction activity, employment and new orders were all lower in June suggesting that it will be some time yet before the industry recovers. Commercial construction and engineering construction remain very weak while the residential sectors moved closer to stabilisation. Selling prices continued to fall and flowed through to a further month of lower wage outcomes as employers were squeezed by lower volumes and a drift upwards in rising input costs. Beyond the immediate issues, considerable uncertainties remain over the longer-term impacts of the pandemic on the demand for commercial buildings and on net overseas migration which for many years has been an important driver of residential building activity. In this context, infrastructure investment assumes particular importance and there is clearly capacity for governments to oversee significant expansions of existing programs,” Dr Burn said.

HIA Economist, Tom Devitt, said: “The easing of the rate of decline in building activity and new orders – for both houses and apartments – is a positive development following the return of potential homebuyers to the market, plus recent government support and incentives. This should provide a valuable buffer, especially in states like WA where building pipelines were dangerously low. Even if the worst is now behind us, the lags involved mean the impact of the last few months will continue to weigh on construction activity in the second half of the year, and beyond for as long as migration rates and the broader economy remain below pre-pandemic levels,” Mr Devitt said.

Australian PCI® – Key Findings for June (2020):

  • June (2020) marked a 22nd consecutive month of contraction in the Australian PCI® (up 10.6 points to 35.5), with the rate of decline slowing for a second month after April (2020)’s record lows.
  • Across the construction industry, national activity restrictions due to COVID-19 continue to take a heavy toll on construction activity (up 13.7 points to 35.1), even though the industry has not been subject to mandatory shut-down requirements like many other industries. Looking ahead, the new orders index recovered 9.8 points to 32.8 but remains at chronically weak levels.
  • The supplier deliveries index recovered by 4.6 points to 33.9 after falling to a record low in May (2020). Survey participants continue to report reduced orders but fewer delivery disruptions in June (2020).
  • Among the four construction sectors in the Australian PCI®, all activity indices improved in June (2020) but remained firmly negative. The house building (up 19.4 points to 39.6) and apartment (up 23.2 points to 44.8) sectors improved by a greater margin than commercial (up 8.5 points to 26.6) and engineering construction (up 8.3 points to 32.1), perhaps reflecting some impact from federal and state government grants and the reopening of display homes as restrictions lifted in most states.
  • The index for input prices fell again (down 2.6 points to 62.1), while selling prices recovered further in June (2020) (up 11.8 points to 40.2) after hitting recent lows in April (2020). Selling price falls continued across all construction sectors as competition intensified for fewer projects.
  • The average wages index slid 2.7 points to 44.3 but the employment index partly recovered in June (2020) (up 11.3 points to 40.4) after precipitous falls in April (2020). This indicates a continued decline in work but at a slower pace, with many survey participants highlighting the importance of support from the JobKeeper and Apprentice Support schemes.

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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