Construction activity shrinks for first time in 20 months

Despite a spike in infrastructure works, Australia’s overall construction activity is continuing to slow down, mainly due to a sluggish housing sector.

The monthly Australian Performance of Construction Index (Australian PCI), compiled by the Australian Industry Group and Housing Industry Association, declined by 2.5 points to 49.3 in September, signalling the first easing in overall construction industry conditions in 20 months (with readings below 50 indicating contraction in activity.)

“The overall industry was weighed down by the residential sub-sectors with the continuing fall in apartment work reinforced by a drop in house building activity,” said Ai Group Head of Policy, Peter Burn.

“The infrastructure boom concentrated in the south-east corner saw engineering construction extend its run of growth to 18 months. Strong demand from this sub-sector is keeping pressure on input costs and fueling concerns over personnel shortages across a range of skilled occupations.

“At the same time, the downturn in the residential sub-sectors is associated with falls in industry-wide employment over the past few months with a decline in new orders pointing to the likelihood of a further easing of employment over the period ahead.”

HIA Economist, Diwa Hopkins, said recent market updates accurately reflected the latest PCI findings.

“Recent home prices, home building approvals and new home sales are unanimous in showing a deterioration in conditions in the residential construction sector,” she said.

“Tighter credit conditions, declining home prices and a large volume of additional housing stock that is steadily flowing onto the market are key factors behind the deterioration.

“Earlier updates to the Australian PCI were showing the effects of these factors were concentrated in the apartment market. Now we're seeing the effects spill over to the detached house segment of the market. We’re expecting both house and apartment building activity to decline in 2019.

“Given the all-time highs from which this decline is occurring the overall level of building should still remain healthy by historical standards.”

Across the four sub-sectors in the Australian PCI, house building declined for a second consecutive month and at the steepest rate since August 2016 (down 7.8 points to 42.0), while apartment building recorded a seventh month of contraction, albeit at a slower rate (up 11.4 points to 44.2).

Engineering construction remained the strongest performing area of activity, with its rate of growth lifting strongly (up 10.7 points to 65.7) on the back of an expanding pipeline of publicly funded major projects.

Commercial construction remained subdued, in slight negative territory for a third month (up 0.6 point to 49.8).

The input prices sub-index remained elevated in September (up 0.7 points to 76.1), while growth in wages also continued (down 2.1 points to 60.6).

The activity sub-index returned to modest expansion in September (up 2.5 points to 52.0), but the new orders sub-index contracted (down 9.7 points to 47.1) amid weaker demand conditions across all four industry sub-sectors.

This was associated with a further decline in employment which recorded its sharpest fall in 21 months (down 2.2 points to 46.9).