Construction picks up slightly in June

Despite recording ten straight months of contraction, Australia’s construction sector picked back up slightly last month with engineering construction mainly helping to soften the blow.

The Australian Performance of Construction Index (Australian PCI) increased by 2.6 points to 43.0 in June.

The Australian PCI is adjusted monthly by the Australian Industry Group and Housing Industry Association. Readings below 50 indicates contraction in activity while the distance from 50 indicates the strength of the decrease.

The slower rate of decline is reflected in the easing in contraction across a number of areas including activity (up 5.2 points to 44.9), new orders (up 2.1 points to 41.5) and employment (up 4.1 points to 43.6). However, a steeper rate of decline in deliveries from suppliers (down 3.5 points to 41.5) highlighted the subdued overall state of business conditions.

Across the four sub sectors, namely apartment, housing, engineering and commercial construction; only engineering construction is in mild expansion (up 0.4 points to 51.6), while the rest remain in contraction.

House building was again the weakest performing sector, declining for an 11th straight month (up 0.2 points to 36.3), while apartment building also remained firmly in negative territory despite recording its slowest rate of decline in 10 months (up 1.2 points to 37.9).

The input prices index dropped two points to 67.4, while growth in wages also continued, holding steady at 60.9 points as difficulties in sourcing skilled labour persist.

The selling prices index continued to contract in June, and at a sharper rate of decline (down 4.6 points to 31.6). The widening gap between the input and selling prices indices demonstrates that profit margins continue to be squeezed for businesses in the construction industry.

“While the pace of decline in new orders and employment were both lower in June, they remain in negative territory suggesting it may take several months before a recovery takes hold,” said Ai Group Head of Policy, Peter Burn.

“Builders will be hoping the recent cuts to interest rates and the forthcoming reductions in income tax will help turn the market around.”

HIA Economist, Tom Devitt, said the jump in the PCI in June points to more positive things ahead, particularly for the housing sector.

“The end of the uncertainty surrounding the federal election and the retention of existing capital gains tax arrangements acted to boost market confidence,” he said.

“Combined with the RBA’s June interest rate cut and a stabilisation in dwelling prices, we are now seeing the downturn in the residential building sector ease.

“Tuesday’s additional RBA interest rate cut, together with incoming tax cuts and potential loosening of APRA’s lending restrictions will assist in stabilising the sharp downturn the market experienced over 2018.”