Construction contraction softens in November

The Australian construction sector is slowly showing signs of recovery, although there are still significant roadblocks allowing it to return to growth phase, according to the Australian Industry (Ai) Group and the Housing Association of Australia (HIA).

The Australian Performance of Construction Index (Australian PCI®), adjusted monthly by the Ai Group and HIA, rose by 4.9 points to 48.2 in November.

While this is the sector’s sixth month in contraction (readings below 50 indicate contraction, with lower results indicating stronger rate of contraction), the rate of decline has eased compared to October.

A key improvement in November was employment, rising 9.6 points to 51.6, which the expert group said was due to reduced absenteeism.

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“However, the industry remains in mild contraction, and wage and input costs remain elevated and are still growing,” said Ai Group Chief Policy Advisor, Peter Burn.

“The cumulative effect of interest rate rises and increased economic uncertainty poses concerns for the industry looking forward.”

All four sub sectors remain in contraction although the rates of contraction have softened. Residential construction, namely housing and apartment, have improved significantly from October, rising 8.7 and 8.6 points respectively.

"The RBA has already had a material impact on home buyer interest in the market. New home sales and home lending have dropped substantially,” said HIA Economist, Tom Devitt.

“Labour shortages also look to have peaked, aided by the return of overseas workers and fewer worker hours being lost to illness which should help ease price pressures.

“But the lags that characterise this cycle mean the full impact of the RBA's hikes to date won't be seen until the second half of 2023."

Devitt added further interest rate rises in 2023 would jeopardise the housing industry's 'soft landing' in 2024 and beyond.

“This undermines the Australian Government's goal of one million new homes in the five years to the end of 2028. This would have serious implications for housing affordability across Australia,” he said.

The new orders index improved slightly but is still in contraction at 45.3, due to ongoing demand side pressures such as rising interest rates and economic uncertainty.

Supply side constraints, especially a shortage of skilled trades, continue to inhibit activity, but there are signs of materials supply chain pressures easing.

The selling prices index dropped 8.4 points, however input prices have jumped up to 91.9 points, widening the gap between both indices.

Capacity utilisation rose slightly to 82.9 per cent and remains elevated as it has been since the start of 2021.

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