QTPA Member Alert | OCTOBER 2012 PERFORMANCE OF CONSTRUCTION INDEX (7/11/2012)

OCTOBER 2012 PERFORMANCE OF CONSTRUCTION INDEX

Australian Industry Group – Housing Institute Australia Building and Construction Report (released Wednesday 7^th of November).

NB: Construction Decline Moderates As Orders Improve.

Some good news for Christmas. For the first time in a number of years (29 months), the monthly change has provided all positives.  New orders have had the slowest rate of contraction in 10 months.  Construction activity and capacity was 4.8 points above the level of September, indicating a slower rate of contraction in total industry activity.  Apartment building is the weakest performing of the subsectors house building activity registering a solid 12.5 points rise and the slowest rate of decline in the past nine months.

Key Findings

• The national construction industry continued to decline in October. However, the rate of contraction moderated to its slowest pace in seven months, largely in response to a less pronounced decline in new orders and deliveries from suppliers.

• The seasonally adjusted Australian Industry Group/Housing Industry Association Performance of Construction Index increased by 4.9 points in October to 35.8. Nevertheless, it remained below the critical 50 points level (that separates expansion from contraction) for a 29^th consecutive month.

• While all of the four major sectors of the industry registered contractions in activity during October, there was a distinct moderation in the rate of contraction in both the house building and commercial construction sectors. Apartment construction remained the worst performing sector while the pace of decline in engineering construction activity eased slightly during the month.

• Businesses that reported declines in activity largely attributed this to the undermining influences of tight credit conditions, project delays and uncertainty about the economic outlook. However, there were encouraging reports from house builders of an improvement in customer enquiries and buyer confidence, including an increase in first-home buyer activity.

Construction activity and Capacity

• In seasonally adjusted terms, the activity sub-index registered 35.2 in October.

• This was 4.8 points above the level in the previous month, indicating a slower rate of contraction in total industry activity.

• Underlying this result were less pronounced declines in new orders across most sectors which coincided with a slower rate of contraction in deliveries from suppliers.

• Construction capacity utilisation remained at a weak level, falling slightly from a rate of 63.8% in September to 63.7% in October.

Activity by sector

• The contraction in house building activity moderated with the sector’s sub-index registering a solid 12.5 points rise to 41.0, the slowest rate of decline in the past nine months.

• Commercial construction also contracted at a slower rate. The sector’s sub-index increased by 7.8 points to 37.4, more than offsetting the deterioration of the previous month.

• Apartment building remained the weakest performing of the sub-sectors. This is despite a slower pace of contraction in the month as evident by a rise in the sector’s sub-index of 1.6 points to 27.6.

• The engineering construction sub-index increased by 2.4 points to 35.1 with respondents citing that project delays and strong import competition had undermined work levels in the month.

New orders

• New orders (seasonally adjusted) declined in October for the 29^th consecutive month.

• However, the new orders index at 36.8 improved by 7.7 points from the level in September, signalling the slowest rate of contraction in 10 months.

• While the decline in new orders in the apartment sector remained broadly unchanged, all other broad industry sectors registered less pronounced contractions.

• This result suggests that the decline in new orders may have passed a low point with the likelihood of further improvement in total industry activity in coming months.

New orders by sector

• New orders in the house building sector declined at a slower rate with the sub-index rising by 6.5 points in the month to 31.3, an early sign that the interest rate cuts by the RBA since last November may be starting to have an influence on demand within the sector.

• In the commercial construction sector, the new orders sub-index registered 36.8, a rise of 5.6 points from the previous month and the slowest rate of contraction since December last year.

• For the engineering construction sector, the contraction in new orders was also less pronounced with the sub-index rising by a solid 12.6 points to 44.6.

• Incoming business in the apartment sector continued to languish. The new orders sub-index remained broadly unchanged at 26.7, the steepest rate of contraction of the four broad sub-sectors.

Employment and Wages

• Employment continued to contract, and at a steeper rate than the previous month.

• The employment sub-index registered 32.0 in October, a decline of 1.0 point on the previous month.

• Reports indicate that this reflects on-going efforts by businesses to reduce costs amid persistently tough market conditions.

• Growth in wages continued in October, albeit at a slower rate than in the previous month, with the sub-index falling by 3.3 points to 54.7.

Deliveries, Input Costs and Selling Prices

• Deliveries of inputs from suppliers continued to decline in October.

• However, after contracting in September at the sharpest rate in the seven year history of the survey, the rate of decline moderated in October with the supplier delivery index rising by 9.4 points to 41.5.

• Input price inflation increased in October. The input costs sub-index registered 71.6, a rise of 3.3 points from the previous month.

• Reflecting strong competition for available work, selling prices again contracted, albeit at a slightly slower pace with the sub-index rising by 1.9 points to 37.8 in the month.

*Results are based on a sample of over 150 companies. **Number of months moving in the current direction.

GLOBAL COMPARISONS (index out of 100)

INDUSTRY SECTOR COMPARISONS