Australian PCI®: Construction slump eases in July 2020

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) rose by a further 7.2 points to 42.7 points in July 2020. This indicates business conditions remained negative across the construction industry in July 2020, but the pace of contraction eased from the recent record lows. July 2020’s survey was conducted before the latest restrictions in Victoria. Results below 50 points indicate contraction with lower results indicating a faster rate of contraction.

Activity and new order indices improved in three of the four sectors included in the Australian PCI® in July (2020) but they remained negative for all sectors (under 50 points). Apartment building dropped further in July (2020), with respondents noting little prospect of a recovery in demand from international and local investors in the near term. House builders said demand for new houses and renovations is lifting (from close to zero) in response to federal and state government grants, reopening display homes and easing activity restrictions in Australian states other than Victoria.

Group Head of Policy, Peter Burn, said: “The construction sector contracted again in July (2020) with further falls in residential building and commercial and engineering construction. An encouraging sign was that the pace of contraction slowed markedly overall with only the apartment building sector slumping at a faster pace in July (2020). Employment fell again in the month despite reports from some respondents about the role JobKeeper was playing in slowing the loss of jobs. The wages index extended a rare foray into negative territory while input prices continued to rise – although at a very modest pace. Selling prices remained weak. The sudden tightening of restrictions on Victorian construction projects will have a material impact at a national level in the coming period and will have particularly severe consequences for activity, employment and on the many businesses that supply into the construction sector in Victoria. Even before the new restrictions were announced, the immediate outlook for the sector was weak with new orders falling again in July (2020). Further policy measures will be required to stem a longer wave of job losses and business closures,” Dr Burn said.

HIA Economist, Angela Lillicrap said: “Today’s (August 5 2020) data shows that confidence in the housing market has improved with the easing of restrictions and the Australian Governments’ HomeBuilder grant which has led to some new orders for homes. The market remains suppressed well below levels experienced prior to COVID-19. Activity in the apartment market continued to contract in July (2020). There are over 130,000 multi-unit dwellings under construction. If no new projects enter the pipeline, then once these projects reach completion there will be a significant decline in employment in the sector which will weigh on the wider economy,” Ms Lillicrap said.

Australian PCI® – Key Findings for July 2020:

  • Activity indices improved markedly in July 2020 in three of the four sectors included in the Australian PCI®, but remained negative for all (not taking into account the latest Victorian Level 4 restrictions).
  • Input prices dropped further in July 2020 to its lowest monthly result since 2011, reflecting weak demand for building materials and other inputs.
  • The average wages index recovered by 3.1 points and the employment index recovered by a further 1.0 point from recent lows.
  • The Australian PCI® activity index recovered a further 10.5 points in July 2020. New orders index recovered by a further 10.7 points to 43.5 points in July 2020 and back to the mildly negative levels seen through late 2019.
  • The national JobKeeper and Apprentice Support schemes were crucial to supporting employment in June and July 2020. Customer inquiries are picking up in some (not all) locations in response to renovation grants.

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