Construction index plunges in April 2020 to record low level

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The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) dropped by 16.3 points to 21.6 in April 2020, pointing to the weakest overall performance for the construction industry since the survey began in September 2005 (readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease).

Slow activity on building sites due to projects that have either been cancelled or put on hold resulted in activity, new orders and employment all falling at their sharpest rates on record for the Australian PCI®, while the overall index’s decline marked the largest month-to-month fall in its history, exceeding those recorded during the global financial crisis.

Ai Group Head of Policy, Peter Burn, said: “The fallout from COVID-19 played havoc with the already weak domestic construction sector in April (2020). The Australian PCI®, which we have been compiling since 2005, has never recorded a lower seasonally adjusted performance and has never fallen as rapidly in a single month as it did for April (2020). For the sector as a whole, seasonally adjusted measures of activity, employment and new orders were at all-time lows. The worst hit sectors were apartment building and commercial construction. House building took a tumble and engineering construction, while only down slightly on March (2020), has never recorded a weaker performance than for April (2020). Two particularly disconcerting indications are the precipitous fall in new orders and the first ever indication of a monthly fall in nominal wages (since 2008 when we started compiling this series). It is now critical that the very welcome assistance measures provided by federal, state and territory governments are backed up with an orderly and safe easing of the restrictions that are hindering a return to work,” Dr Burn said.

HIA Chief Economist, Tim Reardon, said: “The positive momentum that existed in the housing market has been disrupted as consumer confidence started to evaporate from March (2020). The seasonally adjusted indexes for building activity and new orders in both the house and apartment markets all suffered their largest single-month drop in the history of their respective series, falling to record lows. The speed with which the industry is likely to bounce back, especially apartment markets in the larger capitals, will depend very much on the outlook for overseas migration,” Mr Reardon said.

Australian PCI® – Key Findings for April 2020:

  • April (2020) marked a 20th consecutive month of contraction in the Australian PCI® (down 16.3 points to 21.6), and the weakest overall performance in the survey’s 15-year history.
  • Across the construction industry, activity (down 21.1 points to 18.0) and new orders (down 19.7 points to 15.7) both contracted at rates that were the steepest since the Australian PCI® survey began in September 2005. A distinct lack of new work to replace completed projects also continued to act as a significant brake on employment (down 10.8 points to 25.6) and supplier deliveries (down 8.7 points to 34.1).
  • Of the four construction sectors in the Australian PCI®, apartment building performed worst in April (2020) (down 4.5 points to 22.1), contracting at its most severe rate since the start of the trend data series for this sub-sector in March 2016. House building also fell further into negative territory (down 5.3 points to 37.1) amid reports of lower home sales, cancelled contracts and a lack of enquiries.
  • Across the major project areas, commercial construction (down 4.3 points to 24.5) contracted at its sharpest rate since early 2016, with reports of further falls in demand. The index for engineering construction (down 1.1 points to 36.6) also indicated a continued decline in the month, although only slightly steeper than in March (2020).
  • The input prices index decreased by 5.7 points to 65.3 in April (2020), indicating cost pressures in the construction industry moderated during the month. However, the selling prices index fell 13.2 points to 26.2, signaling the sharpest fall in selling prices since the survey began in September 2005. This indicates rising costs are largely being absorbed by builders, squeezing already slim margins.
  • The average wages index fell by 10.5 points to 43.7 in April (2020), representing the first decline recorded since the series began in January 2008.

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