Construction activity stabilises in March

March was another positive month for the construction sector, with the contraction in activity for most sub sectors happening at a slower rate compared to previous months.

The Australian Performance of Construction Index (Australian PCI), adjusted monthly by the Australian Industry (Ai) Group and Housing Industry Association (HIA), increased by 1.8 points to 45.6 in March, indicating a slight easing in the construction industry’s aggregate rate of contraction readings. Readings above 50 indicate expansion while readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the increase or decrease.

However, despite the slight relief in activity, conditions in the sector are expected to remain soft for the foreseeable future, according to Ai Group Head of Policy, Peter Burn.

“Looking ahead, the construction industry is likely to remain in negative territory over coming months due to the ongoing fall being recorded in new orders,” he said.

“On the positive side, there is clearly capacity to lift construction activity if policy makers are looking to stimulate the slowing economy.”

Across the four sub sectors, engineering construction is the only sector in expansion phase, with the index going up 1.5 points in March to 50.5.

“After four months of decline, engineering construction stabilised in March amid reports of new project starts and an improvement in tender opportunities,” Dr Burn said.

The other three construction sectors in the Australian PCI continued to contract in March, with residential construction bearing the full brunt. Commercial construction fell 0.8 points to 41.9 amid an ongoing fall in demand for projects; while house building remained deep in negative territory with an index of 35.8. Apartment construction did not experience much relief either, with the index going up just 1.0 point to 31.3.

“Falling house prices impeded market confidence and the unanticipated credit squeeze combined to accelerate a decline in the market in the second half of 2018,” said HIA Economist, Tom Devitt.

“The backlog of projects that have accumulated over the last few years will continue to sustain a relatively high level of activity.

"This strong pipeline of work is being worked down at present and this will continue unless there is an improvement in the amount of work entering the pipeline.”

Most other indexes remain broadly unchanged, with the exception of input prices which fell by 5.0 per cent to 63.7.

Growth in wages went down 0.4 points to 59.2, reflecting the ongoing difficulty in sourcing skilled workers.

The selling prices index continued to contract in March, albeit at a slightly slower rate (up 0.7 points to 41.4). The ongoing gap between the input and selling prices indices demonstrates that profit margins remain tight across the construction industry in a highly competitive quoting and tendering environment.