Construction contracts further

The Australian Industry (Ai) Group and Housing Industry Association’s (HIA) Australian Performance of Construction Index (Australian PCI®) contracted by 10.3 points to 38.4 in August to mark a second and more severe month of contraction following a significant decline in July.

Index readings below 50 indicate contraction in activity, with lower readings indicating a stronger pace of contraction.

All four sub sectors suffered big drops last month to sit below 50 points, including housing construction which has been maintaining a healthy level of activity until recent months.

The indexes for activity, new orders and supplier deliveries also dropped steeply into contraction in August, with the impacts mainly concentrated in the south-east of Australia (predominantly Victoria and New South Wales where there are strict lockdowns in place).

However, strict border restrictions around the country in a bid to keep the virus at bay have continued to contribute to supply chain disruptions as well as personnel movement, the report showed.

"Australia's construction sector has shifted from healthy expansion to steep contraction in a flash as restrictions in the face of COVID-19 outbreaks have closed sites and disrupted supply chains,” said Ai Group Head of Policy, Peter Burn.

Across the four sub sectors, house building suffered the largest fall – down 14.4 points to 36.4, followed by commercial construction - down 11.6 points to 31.3 to both sit well below 50 indicating a larger scale of contraction.

Engineering construction also fell by 7.7 points to 31.6, while apartment building stabilised a bit, with its index rising 13.3 points to 32.1. However, that number still sits a fair way from its expansionary state in May.

The new orders index fell sharply in August (down 13.1 points to 36.4), indicating serious contraction. Some builders reported lower enquiries from potential customers and less interest in joining waitlists. Supplier deliveries also fell 7.3 points to 36.0 as builders across all sectors and locations reported delivery delays and high freight prices.

“New orders fell precipitously – a pattern evident across the four construction sectors and, in combination with continuing restrictions, pointing to the likelihood of further contraction in September and October,” said Ai Group's Dr Burn.

HIA Chief Economist, Tim Reardon, said the huge fall in the housing construction sector was due to severe restrictions imposed on work sites and conditions in locked down states.

“The industry was not permitted to operate like it did during previous lockdowns, despite its exceptional record of operating safely throughout the pandemic, consistent with COVID safety measures,” he said.

“While this does stretch out the HomeBuilder boom for longer, it carries with it significant costs. Builders can’t work from home. Households that can’t move into their incomplete new homes are saddled with the financial stress of ongoing rent or mortgage payments.

“Government coffers and the broader economy also suffer from the loss of this very valuable activity. Apartment activity is also still contracting in the absence of overseas migrants, students and tourists.”

The index for input prices fell 5.4 points to 91.8 while selling prices dropped 11.6 points to 69.6, indicating some deceleration in price rises in August however remaining elevated.

Builders nationwide continue to report very high prices from suppliers and importers, with more builders saying they need to pass on these cost increases to their customers, the report said.

The employment index dipped just below 50 points in August (down 11.8 points to 49.0), indicating a pause in the jobs recovery underway earlier in 2021.

The wages index fell 8.7 points to 68.4 following a recent peak in July which reflected new minimum wage and award rates from July 1. Builders continue to report wage pressures arising from skill shortages.