Australian PCI®: Year ends with weakest construction performance since May 2013

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) fell 1.1 points to 38.9 in December, 2019 with deteriorating indices for activity, new orders and supplier deliveries contributing to the lowest Australian PCI® result in six and a half years (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 ended 2019 on a low note with activity, employment and new orders all falling in December (2019). The performance of the engineering construction sector slumped further, declining at the most precipitous rate in more than a decade. Commercial construction and apartment building activity also ended the year heading lower. In contrast, house building activity lifted marginally. New orders across the industry were lower with stability in orders for new house builds offset by shrinking new orders across the three other sectors. While the quantity of infrastructure projects in the pipeline and the recent announcement of a bring forward of some projects provides some comfort, the broader industry is undergoing a difficult period of adjustment. This is flowing through to other sectors – particularly to industries supplying machinery and equipment and building and construction materials. There is now a clear danger of a self-reinforcing downturn across significant parts of the domestic economy,” Dr Burn said.

HIA Economist, Thomas Devitt, said: “Housing continues to defy broader construction activity, with the house building activity index climbing further to 50.8. This places it unambiguously above the crucial no-change threshold, indicating growth for the first time since 2018. House building new orders is also now just a whisper below the no-change threshold after its rate of contraction moderated over the last six months. Recent housing finance data reinforces this trend so we can expect the market to continue its moderation as recent – and potential future – policy stimulus continues to be absorbed,” Mr Devitt said.

Australian PCI® – Key Findings for December 2019:

  • December 2019 marked a 16th consecutive month of contraction in the Australian PCI®, which fell to its lowest result since May 2013 (down 1.1 points to 38.9).
  • The activity index in the Australian PCI® fell sharply again in December (2019) with its biggest monthly drop in 12 months (down 4.4 points to 36.5). The rate of decline in new orders also steepened marginally (down 0.6 points to 36.9), and construction businesses continued to reduce their supplier deliveries (down 2.7 points to 41.4) in response to weak demand. Employment also continued to decline, albeit at a slower rate (up 3.4 points to 42.8).
  • Of the four construction sectors in the Australian PCI®, house building was again the best performing sector with activity showing stability for a second month (up 0.8 points to 50.8). In contrast, apartment building remained firmly in negative territory (up 0.9 points to 37.4).
  • Across the major project sectors, engineering construction fell for a seventh month and at its sharpest rate in just over a decade (down 2.7 points to 29.5) while commercial construction recorded a 17th month of contraction, with demand conditions remaining patchy across key industrial and commercial property categories (down 1.5 points to 41.3).
  • The input prices index in the Australian PCI® remained elevated in December (2019) (down 2.9 points to 64.9) while the selling prices index increased by 4.3 points to 48.0. The wide gap between these price series suggests profit margins remain tight for many construction businesses.
  • Growth in wages also continued in December (2019), although at a slower pace (down 3.4 points to 57.1).

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