Lockdowns wreak havoc on construction

After nine months of expansion, the construction sector is thrown back into contraction as COVID-19 lockdowns in multiple states meant disruptions to construction activity and material supply, according to the Australian Industry (Ai) Group and Housing Industry Association’s (HIA) latest report.

The Australian Performance of Construction Index (Australian PCI) fell by 6.8 points to 48.7 in July, which marks the first time the construction sector has gone into negative growth since September 2020. Readings below 50 indicate contraction, with lower results indicating a stronger pace of contraction.

This follows a boom from late last year to early this year due to strong community response to the Government’s HomeBuilder incentive, with the growth trajectory slowly tapering off in recent months after the application deadline passed.

As the COVID-19 Delta variant raged across the country, strict lockdowns to curb the virus meant a complete halt or severe restrictions on activity and movements, not just in the construction space but in all other economic sectors.

Builders in the hardest hit states of NSW and Victoria, which were in partial or full lockdown in July, reported severe disruptions to activity on site and supplier deliveries across all segments of construction, while other states remained mildly expansionary.

Activity across the sub sectors also moderated or fell further following very strong results in recent months, with apartment construction suffering the biggest fall – down 5.3 points to 35.0.

House building, which has been on a roll since late last year, is slowly stabilising with the index dropping 3.1 points to 54.1. Commercial construction activity slowed in July (down 0.1 point to 52.9) but remained mildly expansionary nationwide. Engineering activity held stable although dipping mildly into the contractionary phase (down 3.9 points to 49.2).

The new orders index fell in July to sit just below the 50-point level (down 6.6 points to 49.5). Across the sectors, new orders growth for housing slowed but remained largely positive, while orders for apartments contracted further. New orders for commercial projects dropped, particularly in NSW and Victoria, while confirmation for new engineering projects continued at around the same pace as in recent months, with only a slight deceleration.

The indices for input prices (down 1.1 points to 97.2) and selling prices (down 4.0 points to 81.2) remained high although both have eased off slightly in July from record highs in June. Builders nationwide continue to report very high prices from suppliers and importers, with more builders saying they need to pass on these cost increases to their customers.

The employment index went up again in July (up 2.5 points to 60.8) and remains elevated despite widespread lockdowns and disruptions. Construction capacity utilisation was steady at its record high of 85.4 per cent. The wages index jumped 6.7 points to 77.1 as the new financial year brought a rise in the minimum wage and award rates, on top of wage pressures arising from skill shortages.

“Builders and constructors reported difficulties obtaining inputs and skilled labour,” said Ai Group Head of Policy, Peter Burn.

“Some of this is due to COVID-19 restrictions and some attributable to the strength of the expansion over the previous nine months.

“The outlook over the next couple of months will depend heavily on the paths of the COVID-19 outbreaks and the extent of restrictions.”

“Despite these lockdowns, there remains a record volume of new detached home building and renovation work to be undertaken, when restrictions ease,” said HIA Chief Economist, Tim Reardon.

“For builders in other regions, their main challenge remains keeping up with the large volume of work. Capacity constraints will remain a major challenge for at least the rest of this year.

“The exception to this is apartment construction, which continues to feel the adverse impact of constraints on migration.”