Construction sector ends year with a whimper

Weakened conditions across all construction sub sectors in December 2018 have caused the Australian Performance of Construction Index (Australian PCI) to decline at its sharpest rate since 2013 to 42.6, marking a fourth consecutive month of contraction in the industry.

The Australian PCI readings are collated monthly by the Australian Industry (Ai) Group and the Housing Industry Association (HIA), with readings above 50 indicating expansion, and under indicating contraction.

For the first time in 22 months, the strongest performing engineering construction sub sector fell into mild contraction, dropping 2.6 points to 48.3. Commercial construction recorded a fifth month of decline, falling 0.9 points to 45.0.

Residential construction continued to soften, with apartment building falling a further 2.7 points to 26.3; and house construction declining by 2.6 points to a six-year low of 35.4.

“With construction accounting for close to 10 per cent of both GDP and employment, the downturn in this sector will weigh on the overall economy,” said Ai Group Head of Policy, Dr Peter Burn.

“That said, levels of construction activity remain respectable by historical standards with infrastructure work in particular likely to continue to account for a significant proportion of overall activity.”

HIA Acting Principal Economist, Geordan Murray, weighed in on the findings, particularly in the residential sector.

“The interplay between falling home prices in the major housing markets on the east coast and the restrictive lending environment weighed heavily on residential building during the latter stages of 2018,” he said.

“There is still a large volume of residential building work to be done on projects that are currently underway but as we progress through 2019, more of the existing projects will reach completion.”

The new orders index continued to drop by 4.8 points to 41.0, signalling weaker demand which translates to a further slowdown in activity, particularly in the housing sector.

“The softening in Australian PCI new orders sub-indexes suggests that the completed projects are not likely to be backed up by new projects entering the pipeline,” Murray added.

“The volume of residential building activity is set to fall in 2019. Residential building won’t be the driver of economic growth that it has been over the last few years.”

Despite the falls across most sub sectors, the employment index increased by 5.1 points to 49.4, indicating a broadly unchanged level of total construction employment.

The input prices index remained elevated in December, down 1.1 points to 72.0; while growth in wages also continued albeit at a slightly slower rate (down 0.7 points to 60.9).

The selling prices index continued to contract in December, and at a steeper rate (down 6.5 points to 40.6), with the ongoing gap between the input and selling prices indices indicating that profit margins remain tight across the construction industry amid strong competition in securing work.