Construction downturn shows some signs of easing in March 2019

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 1.8 points to 45.6 in March 2019, indicating a slight easing in the construction industry’s aggregate 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: “Australia’s construction downturn continued in March (2019), although there are some encouraging signs that the overall rate of contraction has eased. Activity fell at a slower pace at the end of Q3 – as more planned projects moved through to construction – while the decline in new orders also moderated slightly. Residential building conditions remain particularly subdued and commercial construction is continuing to detract from industry wide performance. However, after four months of decline, engineering construction stabilised in March (2019) amid reports of new project starts and an improvement in tender opportunities. Looking ahead, the construction industry is likely to remain in negative territory over coming months due to the ongoing fall being recorded in new orders. On the positive side, there is clearly capacity to lift construction activity if policy makers are looking to stimulate the slowing economy,” Dr Burn said.

HIA Economist, Tom Devitt, said: “The contraction in Australian home building activity continues despite easing in recent months. Falling house prices impeded market confidence and the unanticipated credit squeeze combined to accelerate a decline in the market in the second half of 2018. The backlog of projects that have accumulated over the last few years will continue to sustain a relatively high level of activity. This strong pipeline of work is being worked down at present and this will continue unless there is an improvement in the amount of work entering the pipeline,” Mr Devitt said.

Australian PCI® – Key Findings for March 2019:

  • The activity index in the Australian PCI® continued to contract in March 2019, but at the slowest pace of decline in six months (up 4.5 points to 46.1). New orders also fell at a slightly slower rate (up 1.3 points to 44.5), while deliveries from suppliers fell for a fifth consecutive month (up 0.4 points to 45.8). Employment maintained a largely unchanged rate of contraction (up 0.1 points to 46.1).
  • Three of the four construction sectors in the Australian PCI® continued to contract in March 2019, with engineering construction stabilising amid reports of an increase in tender opportunities (up 1.5 points to 50.5). Commercial construction also fell further into contraction amid an ongoing fall in demand for projects (down 0.8 points to 41.9).
  • In the residential construction sectors, the downtrend in approvals from historic highs is continuing to weigh on overall industry conditions. House building (up 0.1 points to 35.8) remained deep in negative territory for an eighth consecutive month while apartment building completed a full year in the doldrums (up 1.0 points to 31.3).
  • Cost pressures in the delivery of construction projects remain a concern due to elevated energy costs and supplier price rises, despite the input prices index moderating somewhat in March 2019 (down 5.0 points to 63.7). Growth in wages also continued at a broadly unchanged rate (down 0.4 points to 59.2), reflecting the ongoing difficulty in sourcing skilled workers.
  • The selling prices index continued to contract in March 2019, albeit at a slightly slower rate (up 0.7 points to 41.4). The ongoing gap between the input and selling prices indices demonstrates 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