Construction falls at steepest rate in six years

May proved to be another challenging month for the construction industry as the Australian Performance of Construction Index (Australian PCI) fell another 2.2 points to 40.4, signalling a ninth consecutive month of contraction.

According to the Australian Industry Group and Housing Industry Association, which adjust the index monthly, that is the steepest rate of decline in six years and is now at its lowest point in years.

Three of the four sub sectors in the Australian PCI continued to contract in May, with only engineering construction achieving some stability (up 0.4 points to 50.3).

House building was the weakest performing sector - falling another 0.4 points to 34.4, while apartment building also remained firmly in negative territory (up 2.0 points to 37.7).

New orders fell 5.0 points to 39.4 – its steepest rate in more than four years. This was associated with a continued decline in deliveries from suppliers (down 1.4 points to 45.0) and a further drop in employment (up 0.3 points to 39.5).

“Falling building approvals are continuing to weigh on residential activity,” said Ai Group Head of Policy, Peter Burn.

“Disappointingly, the recent soft patch in engineering construction extended into May, although there were encouraging signs of some improvement in tender opportunities and the uptake of new work as more planned infrastructure projects moved through to construction,” he said.

“Nevertheless, with construction orders on a broad industry basis dropping at their steepest rate in just over four years, the overall construction downturn looks likely to continue over coming months.

“The industry and businesses in its supply chains will be hoping that lower official interest rates will flow through to borrowers and help turn around the recent negative trends.”

According to HIA Economist, Tom Devitt, uncertainty leading up to the Federal election in May weighed heavily on the sector during the month.

“Housing market sentiment improved in the weeks following the federal election but it is still too soon for any improvement to translate through to activity on the ground,” he said.

“With major banks set to pass on most of the RBA's rate cut to borrowers, it will be interesting to note whether any post-election glee translates to a lift in new orders in June.”

Cost pressures continued for building projects in May, with the input prices index jumping 7.7 points to 69.4. Growth in wages also continued and at a faster pace (up 5.2 points to 60.9), as difficulties sourcing skilled labour persist.

The selling prices index continued to contract in May, albeit at an easing rate of decline compared to April's six-year low (up 4.4 points to 36.2). The sizable gap between the input and selling prices indices demonstrates that profit margins are being squeezed for many businesses in the construction industry.

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