Australian PCI®: Construction downturn eases slightly in June 2019

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 2.6 points to 43.0 in June 2019, indicating a slight easing in the construction industry’s overall 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 sector remained in contractionary territory in June (2019) for an eleventh consecutive month. There are, however, signs of a bottoming of the retreat of the residential sectors and the pace of decline of commercial construction also eased. Engineering construction lifted again in June (2019) and helped reduce the extent of contraction across the sector. Selling prices across the sector are still very soft and margins tightened as both input costs and wages continued to rise. While the pace of decline in new orders and employment were both lower in June (2019), they remain in negative territory suggesting it may take several months before a recovery takes hold. Builders will be hoping the recent cuts to interest rates and the forthcoming reductions in income tax will help turn the market around,” Dr Burn said.

HIA Economist, Tom Devitt, said: “Despite the Australian PCI® remaining in negative territory, its 2.6-point jump this month (June 2019) adds to the list of positive news suggesting that the sharp drop in building activity is starting to moderate. The end of the uncertainty surrounding the federal election and the retention of existing capital gains tax arrangements acted to boost market confidence. Combined with the RBA’s June (2019) interest rate cut and a stabilisation in dwelling prices we are now seeing the downturn in the residential building sector ease. Tuesday’s (July 2 2019) additional RBA interest rate cut, together with incoming tax cuts and potential loosening of APRA’s lending restrictions will assist in stabilising the sharp downturn the market experienced over 2018,” Mr Devitt said.

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

  • June (2019) marked a tenth consecutive month of contraction in the Australian PCI®, if at a slightly slower pace (up 2.6 points to 43.0).
  • The slower fall in the Australian PCI® reflected less pronounced reductions in activity (up 5.2 points to 44.9), new orders (up 2.1 points to 41.5) and employment (up 4.1 points to 43.6), but a steeper rate of decline in deliveries from suppliers (down 3.5 points to 41.5) highlighted the subdued overall state of business conditions.
  • Three of the four construction sectors in the Australian PCI® continued to contract in June (2019) (in trend terms), with only engineering construction expanding mildly (up 0.4 points to 51.6). House building was again the weakest performing sector, declining for an 11th straight month (up 0.2 points to 36.3), while apartment building also remained firmly in negative territory despite recording its slowest rate of decline in 10 months (up 1.2 points to 37.9).
  • Cost pressures remained relatively high for building projects in June (2019), despite the input prices index dropping 2.0 points to 67.4. Growth in wages also continued, holding steady at 60.9 points as difficulties in sourcing skilled labour persist.
  • The selling prices index continued to contract in June (2019), and at a sharper rate of decline (down 4.6 points to 31.6). The widening gap between the input and selling prices indices 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