Construction records steepest fall in six years

The slight ease in conditions in June failed to last as the latest Australian Performance of Construction Index (PCI) nosedived at its steepest rate in six years, to 39.1 points in July.

According to the Australian Industry (Ai) Group and Housing Industry Association (HIA), which adjust the index monthly, a reading below 50 indicates contraction with the distance from 50 indicating the strength of contraction.

Ai Group Head of Policy, Dr. Peter Burn, said the decline is mainly due to continued contraction in residential and commercial building activity.

Apartment and housing construction both remain firmly in the negative territory at 36.4 and 38.3 points respectively, while commercial construction recorded an index of 46.9 in July.

“Engineering construction activity (down 0.8 points to 49.4 in July) maintained its stable pattern of activity of recent months, with reports of some project delays and a decline in new tender opportunities keeping activity weaker than 2018 levels,” Dr Burn said.

“Looking ahead, conditions look more fragile than they have for some time with new orders dropping further into negative territory driven by particular weakness in the pipelines of new work in the housing and apartment sectors.”

According to HIA Economist, Tom Devitt, it’s not all bad news in the residential construction sectors.

“While residential building activity continued to contract in July, there are signs that the pace of decline is moderating,” he said.

“The positive impact of two cuts to the cash rate and cuts to personal income tax rates will take time to have an impact on residential building but it provides a sound basis to expect that the decline in activity will slow over the months ahead.”

The new orders index continued to decline, falling 5.5 points to a six-year low of 36.0 in July. Employment also recorded a sharper rate of contraction (down 7.7 points to 35.9), indicating a general reluctance by businesses to increase their workforce capacity amid ongoing soft demand.

Cost pressures remained relatively high for building projects in July, despite the input prices index dropping 4.2 points to 63.2. Growth in wages also continued, albeit at a more moderate rate (down 3.1 points to 57.8), as difficulties in sourcing skilled labour persist.

The selling prices index continued to contract in July, albeit at a slower rate (up 5.0 points to 36.6). The continued widening of the gap between selling prices and input costs continue to put pressure on construction businesses as profit margins continue to be squeezed.