Infrastructure construction plunges at sharpest rate in a decade

A somewhat stronger house building sub sector failed to produce an uplift in the overall construction industry, with the latest Australian Industry Group and Housing Industry Association Australian Performance of Construction Index (Australian PCI) slipping 3.9 points to 40.0 in November 2019.

A reading below 50 indicates contraction with the distance from 50 indicating the strength of contraction.

Despite the house building sector slowly creeping back into the black (up 1.5 points to 49.7) thanks to recent interest rate cuts and easing in bank lending restrictions, all other sub sectors and indices failed to gain any upwards momentum.

Engineering construction, once the strongest sub sector in the industry, fell for a sixth month and at its sharpest rate in over a decade, down 2.6 points to 33.3. Commercial construction is also down 0.5 points to 43.7, with demand conditions remaining patchy across key industrial and commercial property categories.

Traditionally the weakest sub sector - apartment building continued to contract albeit at a slightly slower rate (up 0.6 points to 37.0).

Across the other indices, new orders and employment both experienced sharp drops, down 6.3 points and 8.4 points to 37.5 and 39.4 points respectively.

“November's fall in employment was the sixteenth consecutive month of decline across the sector and unfortunately, the further drop in new orders is pointing to the likelihood of further falls in the months ahead,” said Ai Group Head of Policy, Peter Burn.

"House building activity defied the declines of the broader Australian PCI this month,” said HIA Economist, Thomas Devitt.

“While this is not an indication that home building is returning to the strong conditions of recent years, it is not declining as fast as was apparent over the past year," he said.

“It is also good to see the effect that record low interest rates and looser lending conditions are having on the established housing market.

“The slingshot in prices in the two biggest cities will help support a positive wealth effect, broader confidence across the economy and eventually increased demand for housing.”

The input prices index in the Australian PCI increased by 2.0 points to 67.8, with elevated energy costs and supplier price rises continuing to exert upward pressure on prices. Growth in wages also continued in November, although at a slower pace (down 2.4 points to 60.5).

The selling prices index continued to contract in November, and at a slightly steeper rate (down 0.9 points to 43.7). This means rising input prices are not, on average, being passed on to customers, indicating a further squeeze in building companies’ profit margins.