Construction decline eases in August

The Australian construction industry has had a roller coaster of a year, with construction activity falling and picking up before slumping and easing again over the course of nine months.

The latest Australian Performance of Construction Index (Australian PCI), adjusted monthly by the Australian Industry Group and Housing Industry Association, sat at 44.6 in August 2019, a 5.5 climb from July numbers. The index sat at its lowest point in May this year at 40.4. Readings under 50 indicate contraction with the distance from 50 signalling the strength of the decrease.

August marks a twelfth consecutive month of contraction, but at the slowest rate of decline in five months.

While still in contraction, new orders and employment picked up pace in August, climbing 7.3 points and 9.9 points to 43.3 and 45.8 respectively. Supplier deliveries also went up by 8.5 points to 48.5 in August.

“This suggests the impact of the June and July interest rate cuts, cuts to income tax and loosening of lending restrictions has started filtering through the market,” said HIA Economist, Tom Devitt.

“Strong house price growth in Sydney and Melbourne also points to improving confidence.”

All four construction sectors in the Australian PCI contracted in August, with apartment building once again the weakest performing sector in a 17th straight month of decline (down 0.4 points to 35.8). House building activity picked up slightly albeit still deep in contraction, up 2.1 points to 42.8.

Commercial construction again declined in August (up 0.2 points to 46.4) amid a further overall fall in demand for commercial building projects. Engineering construction also fell (down 1.7 points to 45.4), at its sharpest rate in 3.5 years. However, the slow conditions in this particular sub sector is not expected to last.

“Concerns among engineering construction businesses about the current lull in activity are offset somewhat by the strength of the pipeline of projects due to start in coming months," said Ai Group Head of Policy, Peter Burn.

Cost pressures continued to rise for building projects in August, with the input prices index rising 6.0 points to 69.2 on the back of elevated energy costs and strong commodity prices. Growth in wages also continued, and at a faster rate (up 3.8 points to 61.6), as difficulties in sourcing skilled labour persist.

The selling prices index continued to contract in August (up 0.6 points to 37.2), indicating that rising input prices and other costs are not, on average, being passed on to customers. The ongoing gap between input prices and selling prices demonstrates that profit margins continue to be squeezed for businesses in the construction industry.