Australian PCI®: Construction downturn eases in January 2020 as house building activity improves

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 2.4 points to 41.3 in January 2020, with the industry’s milder decline this month reflecting less pronounced reductions in activity and new orders (readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease) (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: “While continuing to perform weakly, the Australian construction sector declined at a slower pace in January (2020). The house building sector expanded for the first time since mid-2018 after stabilising in the closing months of last year (2019). Other sectors continued to disappoint with apartment building down for the 22nd straight month; engineering construction continuing the weak patch that began in the middle of 2019; and commercial construction capping a year and a half of monthly declines. Building and constructing businesses are finding themselves squeezed between lower selling prices, growing wages and material input costs rising sharply over January (2020). Not surprisingly, employment across the sector fell and there is little prospect of a quick turnaround with new orders also lower in the opening month of 2020,” Dr Burn said.

HIA Economist, Angela Lillicrap, said: “House building expanded slightly in January (2020) to be the strongest performing of the four construction sectors. This is consistent with other leading indicators including new home sales and housing finance that suggest the market reached a gentle turning point in the middle of the year. The return to house price growth is also boosting confidence in the housing market which is supportive of increased demand for housing in 2020,” Ms Lillicrap said.

Australian PCI® – Key Findings for January 2020:

  • January (2020) marked a 17th consecutive month of contraction in the Australian PCI® (up 2.4 points to 41.3).
  • Across the construction industry, both activity (up 5.8 points to 42.3) and new orders (up 4.0 points to 40.9) continued to contract in January (2020), if at slower rates relative to the previous month. However, there were steeper falls in deliveries of inputs from suppliers (down 2.0 points to 39.4) while employment also recorded further contraction (down 1.1 points to 41.7).
  • Of the four construction sectors in the Australian PCI®, house building was again the best performing sector with activity indicating mild expansion (up 1.0 point to 51.7). In contrast, apartment building remained firmly in negative territory (up 0.1 point to 37.0).
  • Across the major project sectors, engineering construction fell for an eighth month (up 0.5 points to 34.2) while commercial construction recorded a 18th month of contraction amid continued weakness in demand (down 1.1 points to 39.9).
  • The input prices index in January (2020)’s Australian PCI® points to rising cost pressures heading into 2020, climbing 8.2 points to 73.1 – its highest level in 12 months. The selling prices index dropped a further 2.2 points to 45.8, with the wide gap between the price series suggests profit margins remain tight with strong competition among builders.
  • Growth in wages also continued in January (2020), with the average wages index increasing by 1.6 points to 58.7.

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