Australian PCI®: Construction decline eases in August 2019

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Ai Group Head of Policy, Peter Burn, said: “Activity fell for the eleventh consecutive month across the Australian construction industry in August (2019). Activity declined in the residential sectors and in commercial and engineering construction. Apartment building led the way with another steep drop that extended the contraction in this sector into a 17th month. The continued fall in activity is bringing with it a further squeeze in margins with selling prices falling while input costs and wages continue to rise. In what might be an early sign of the impact of recent interest rate reductions, there was an easing in the pace of decline across the activity indexes and most importantly in both employment and new orders. Concerns among engineering construction businesses about the current lull in activity are offset somewhat by the strength of the pipeline of projects due to start in coming months,” Dr Burn said.

HIA Economist, Tom Devitt, said: “The overall rate of decline in the construction industry eased in August (2019) to its slowest rate in five months, with the aid of improving residential conditions. House building is now experiencing its slowest rate of contraction in 11 months. New orders and employment also moderated and wages growth was strong. This suggests the impact of the June and July (2019) interest rate cuts, cuts to income tax and loosening of lending restrictions has started filtering through the market. Strong house price growth in Sydney and Melbourne also points to improving confidence. Broader activity, including recent softness in engineering activity, should also be supported by ongoing public infrastructure investment,” Mr Devitt said.

Australian PCI® – Key Findings for August (2019):

  • August marked a twelfth consecutive month of contraction in the Australian PCI®, but at the slowest rate of decline in five months (up 5.5 points to 44.6).
  • While the rate of decline in the key activity sub-index accelerated slightly relative to July 2019 (down 1.6 points to 42.8), the rates of decline in new orders (up 7.3 points to 43.3), supplier deliveries (up 8.5 points to 48.5) and employment (up 9.9 points to 45.8) were all slower in August 2019.
  • All four construction sectors in the Australian PCI® contracted in August 2019 (in trend terms), with apartment building again the weakest performing sector in a 17th straight month of decline (down 0.4 points to 35.8). House building also weighed heavily on overall industry conditions in its 13th consecutive month of contraction (up 2.1 points to 42.8).
  • Across the major project sectors, commercial construction again declined in August 2019 (up 0.2 points to 46.4) amid a further overall fall in demand for commercial building projects. Engineering construction (down 1.7 points to 45.4) also fell, at its sharpest rate in 3½ years.
  • Cost pressures lifted for building projects in August 2019, with the input prices index rising 6.0 points to 69.2 on the back of elevated energy costs and strong commodity prices. Growth in wages also continued, and at a faster rate (up 3.8 points to 61.6), as difficulties in sourcing skilled labour persist.
  • The selling prices index continued to contract in August 2019 (up 0.6 points to 37.2), indicating that rising input prices and other costs are not, on average, being passed on to customers. The ongoing gap between input prices and selling prices demonstrates that profit margins continue to be squeezed 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