Australian PCI®: Construction continues to decline in September 2019

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) dropped 2.0 points to 42.6 in September (2019), indicating a sharper rate of decline as the construction industry recorded a 13th consecutive month in 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: “The construction industry pulled back further in September (2019)with falls in activity across the residential, commercial and engineering construction sectors. Employment was also lower marking the 14th consecutive month of contraction in employment notwithstanding persistent skill shortages in some occupations. Both the activity and new orders indexes in house building recorded further increases in September (2019) suggesting the pace of decline in this part of the industry at least has eased noticeably over recent months. The signs are less encouraging in the rest of the industry with the overall activity and new orders indexes falling again in September (2019) and building and construction businesses are feeling the pinch between soft selling prices and continuing rises in input and wage costs. In view of these generally weak conditions, the case for an acceleration in infrastructure spending is clearly strengthening,” Dr Burn said.

HIA Economist, Tom Devitt, said: “After building record numbers of apartments over recent years the market has progressed into a contractionary phase of the cycle. The apartment building downturn gathered momentum during September which weighed heavily on the Australian PCI®. House building activity and new orders continued to ease, although the pace of contraction in the detached house sector slowed in September. Recent interest rate cuts have contributed to the stabilisation of home prices, following persistent declines over the last couple of years. This is a sign that confidence in the housing market has improved although the volume of property transactions remains low. We will need to see that improved confidence translate to greater numbers of active market participants in order to halt the contraction in residential building,” Mr Devitt said.

Australian PCI® – Key Findings for September 2019:

  • September (2019) marked a 13th consecutive month of contraction in the Australian PCI® and at a sharper rate than in August (2019) (down 2.0 points to 42.6).
  • The rate of decline in the key activity sub-index in the Australian PCI® accelerated in September (2019) (down 3.7 points to 39.1) while new orders fell for a 13th month (down 1.1 points to 42.2). This was associated with a continued decline in supplier deliveries (down 4.2 points to 44.3).
  • Job declines continued in September (2019) amid soft demand at the aggregate level, but the rate of decline in employment was the slowest in nine months (up 0.4 points to 46.2).
  • Once again, all four construction sectors in the Australian PCI® contracted in September (2019) (in trend terms), with apartment building still the weakest performing sector in a 18th straight month of decline (down 0.9 points to 33.0). The decline in house building also continued in September (2019) (up 2.3 points to 46.2), although the rate of contraction has gradually moderated over the past six months.
  • Across the major project sectors, commercial construction declined for a 14th month (unchanged at 46.7) amid subdued overall demand for commercial building projects. Engineering construction fell at its sharpest rate in just over six years (down 3.0 points to 39.3) with activity continuing to be constrained by a weak uptake of new work.
  • Cost pressures in the construction of building projects moderated in September (2019) (down 4.2 points to 65.0) but remain relatively high due to elevated energy costs and supplier price rises. Growth in wages also continued, although at a more moderate rate (down 5.8 points to 55.8).
  • The selling prices index continued to contract in September (2019), albeit at a slower rate (up 3.8 points to 41.0), indicating that rising input prices and other costs are not, on average, being passed on to customers. This reluctance to raise prices reflects the strong competition among builders in securing work.

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