Construction falls again as headwinds persist

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) remained in negative territory in January 2019, recording only a marginal easing in the rate of decline in rising 0.5 points to 43.1 (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: “The adjustment in the residential construction sub-sectors continued in January (2019) with both apartment and house building performance slipping further. While the decline in activity is now well-established, levels of activity remain respectable by historical standards reflecting the dimensions of the preceding boom. The performance of the commercial construction and engineering construction sub-sectors also remained in negative territory. With infrastructure projects still providing major sources of activity, engineering construction looks set to underpin the overall construction sector in the foreseeable future. Sector-wide employment was lower in January (2019) having held up amid shrinking activity in recent months. Over the course of the next year it will be critical that our labour markets remain flexible so the economy retains the ability to provide new opportunities for employees as patterns of industrial activity shift,” Dr Burn said.

HIA Senior Economist, Geordan Murray, said: “The Australian PCI® continues to flag a slowdown in construction activity. The downturn in the housing markets of Sydney and Melbourne are weighing on the residential building sector. Over a million new homes have been completed in the last five years and there are still another 200,000 under construction. Having made substantial headway in alleviating the housing shortfall the acute price pressures are dissipating – rental price growth has slowed and the median dwelling prices for the major capital cities are declining. This boost in the supply of homes has delivered a marked improvement in the housing options available to households and improved affordability. The residential building industry is now adjusting to weaker market signals and the drop in the Australian PCI® new orders sub-index suggests that there is less residential building activity entering the pipeline. In 2019 we will see building activity continue to drop back from the record levels achieved over the last few years,” Mr Murray said.

Australian PCI® – Key Findings for January 2019:

  • A slightly milder decline in the Australian PCI® in January 2019 (up 0.5 points to 43.1) reflected less pronounced reductions in activity (up 3.7 points to 39.4) and new orders (up 3.1 points to 44.1). But highlighting the soft overall state of business conditions heading into 2019, both employment (down 5.0 points to 44.4) and deliveries from suppliers (down 1.9 points to 46.5) contracted at steeper rates.
  • All four construction sectors in the Australian PCI® contracted in January 2019, with a further weakening in the house (down 1.9 points to 34.4) and apartment building sectors (down 1.6 points to 24.9). Commercial construction was again subdued (down 0.5 points to 44.9) while engineering construction declined for a second month (down 3.2 points to 43.3) amid reports of a lower volume of new work in January 2019 to replace end-of-year completed projects.
  • The input prices index remained elevated in January 2019 (up 2.6 points to 74.6), while growth in wages also continued (up 2.8 points to 63.7).
  • The selling prices index continued to contract in January 2019, albeit at a slower rate (up 3.6 points to 44.2), with the ongoing gap between the input and selling prices indices indicating 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