CONSTRUCTION DOWNTURN IN AUSTRALIA SLOWS

The national construction industry continued to decline in July, albeit at a slower pace, with the Ai Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) up by 4.6 points to 44.1 (readings below 50 indicate a contraction in activity). The easing in the rate of contraction was driven by less pronounced falls in new orders, activity and employment. Notably, the contraction in new orders was the slowest in almost two and a half years. While the house building sub-sector approached an expansion in activity, apartment-building slowed at a steeper pace and commercial construction was also slower in July. The industry continues to face a tough and uncertain environment characterised by tight credit conditions, a lack of public sector building activity and subdued investor sentiment. The further reduction in the cash rate will be welcomed by the construction industry and can be expected to exert a much-needed favourable impact over the next few months.

Key Findings

■■The national construction industry continued to decline in July. However, the rate of contraction moderated in response to less pronounced falls in new orders, activity and employment. Notably, the contraction in new orders was the slowest in almost 2½ years.

■■The seasonally adjusted Australian Industry Group/ Housing Industry Association Australian Performance of Construction Index (Australian PCI®) increased by 4.6 points to 44.1 in July. The index has now remained below the critical 50 points level (that separates expansion from contraction) for 38 consecutive months.

■■July saw solid improvements in house building and engineering construction with both sectors declining at the slowest rate in five months. In contrast, there were steeper contractions in apartment building and commercial construction activity, the latter recording the weakest performance of all four sub-sectors in July.

■■There were encouraging reports from house builders indicating an improvement in customer enquiries and a pick-up in new work in July. However, operating conditions remain extremely difficult. Tight credit conditions, a lack of public sector building activity and subdued investor sentiment were seen as key negative influences on activity amid an uncertain economic backdrop.

Construction activity and Capacity

■■In seasonally adjusted terms, the activity sub-index registered 43.6 in July.

■■This was 2.2 points above the level in June, indicating a further moderation in the rate of decline in total industry activity.

■■This result largely reflected an improvement in demand conditions in the house building and engineering construction sectors.

■■Nevertheless, the rate of capacity utilisation (not seasonally adjusted) was lower in the month, falling from a 13 month high of 68.0% in June 2013 to 64.0%.

Activity by sector

■■The house building activity sub-index rose by 7.0 points to 49.3 in July, the highest reading in five months. At just 0.7 points below the 50-point mark (that separates expansion from  contraction), this is an encouraging sign that activity in the sector is close to stabilising.

■■The engineering construction activity sub-index increased by 6.5 points to 44.0 in July, the slowest pace of contraction in five months.

■■The pace of decline in commercial construction was the steepest of all sectors, with the sub-index falling by 11.4 points to 34.6 in the month. This more than offset the improvement shown in the previous month.

■■The decline in apartment building activity was also more pronounced with the sub-index decreasing by 8.7 points in July to 38.4.

New orders by sector

■■The contraction of new orders in the house building sector was slower in July with the sub-index rising by 8.1 points in the month to 42.9. This was the highest reading (and therefore the slowest rate of contraction) in five months.

■■In commercial construction, the new orders sub-index declined by 3.0 points to 37.7 signalling a weakening in demand in July after the rate of contraction moderated in the previous month.

■■For the apartment building sector, the decline in new orders eased slightly with the sub-index increasing by 1.4 points to 39.6.

■■In the engineering construction sector, new orders recovered from the loss of ground (-13.0 points) of the previous month, rising by 19.3 points to 46.8. This turnaround partly reflects the lumpy nature of investment demand within the sector.

Input costs and selling prices

■■Input price inflation picked up. The input cost sub-index registered 71.2 in July, an increase of 4.6 points on the previous month.

■■Selling prices continued to decline for the 33rd consecutive month, with the sub-index falling by 3.9 points to 33.5.

■■These results underline the persistent squeeze on the profit margins of construction businesses amid rising cost burdens and an intensely competitive tender pricing environment.

Construction Industry Comparisons with Other Countries

(readings above 50 indicates activity is generally expanding below 50 declining – distance from 50 is indicative of strength/weakness)

• AUSTRALIA 44.1 rising.
• UK 51.0 rising.
• GERMANY 54.5 rising.
• IRLAND 43.4 rising.

Sector Comparisons in Australia

• Manufacturing: 42.0
• Services: 39.4
• Construction: 44.1