QTPA Member Alert |RESIDENTIAL SHINES AMID CONSTRUCTION DECLINE

RESIDENTIAL SHINES AMID CONSTRUCTION DECLINE

Australian Industry Group/HIA Construction Index May 2014

KEY FINDINGS

• Despite a ninth consecutive month of expansion in house building, the national construction industry has continued to decline. The seasonally adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) registered 46.7 points in May (readings below 50 points indicate contraction). This was an increase of 0.8points from April, signalling a slightly slower rate of decline for the construction industry as a whole.

• The Australian PCI®  has now been below the 50 point level that separates expansion from contraction for five consecutive months. The decline in May was the slowest since February.

• The milder decline in the Australian PCI®  in May was due to less pronounced reductions in employment and supplier deliveries. However, underlining the continued weakness in overall  industry conditions, activity fell more sharply during the month, as did new orders.

• By sector, house building expanded for a ninth consecutive month, and at a rate that was  broadly unchanged from April. Apartment building also continued to expand with the sector’s  rate of growth increasing to its highest in seven months. In contrast, further contraction was  evident in engineering construction which fell at a steeper rate. Commercial construction again  declined, although conditions in this sector moved closer to stabilisation.

• House builders were generally positive this month, noting that customer enquiries and sales  had continued to hold firm. Respondents in the non-residential construction sector attributedthis month’s weaker activity to a lack of new tendering opportunities, slow public building activity and intense competition for the available work. Engineering construction businesses also noteda further winding back in mining related construction.

ACTIVITY BY SECTOR

• House building conditions continued to expand with the sector’s sub-index registering 54.4 points in May, just 0.2 points below the index reading for April. It marked the ninth consecutivemonth of growth, consistent with the general increase in new orders over this period.

• Apartment building activity strengthened further in May. The sector’s sub-index increased solidly by 7.0 points to 64.9 points in May, the highest rate of increase in seven months.

• Following a marked reduction in activity in April, the commercial construction sector’s sub-index moved very close to stabilisation in May, rising by 4.0 points to 49.7 points. There were somereports of a rise in new project commencements, although conditions were generally reported to be patchy across the major commercial building categories.

• The engineering construction sector continued to contract in May, and at a steeper rate, with its activity sub-index falling by 4.4 points to 34.8 points. This was the lowest activity reading of themajor sub-sectors surveyed this month, with mining related project completions and a diminishing inflow of new work noted as the main factors reducing current activity.

NEW ORDERS BY SECTOR

• New orders in house building increased at a higher rate in May, with the sub-index rising by 2.2 points to a four-month high of 54.5 points. This bodes well for further growth in house buildingconstruction activity in coming months.

• In apartment building, new orders returned to growth after contracting in the previous four months. This sector’s new orders sub-index rose by 3.2 points to 51.8 points.

• In commercial construction, the new orders sub-index decreased by 6.9 points to 44.1 points. This was the lowest reading in the past three months.

• In the engineering construction sector, the new orders sub-index decreased by 1.0 point to 38.4 points, the fifth consecutive month of contraction. The downward drift in this sub-index indicatesthat additions to the project pipeline continue to be outweighed by completions.

EMPLOYMENT AND WAGES

• Employment contracted for a sixth consecutive month in May, albeit at a slower rate than in April. The employment sub-index registered 47.1 points in May, an increase of 3.8 points from April.

• A weakening in resources and infrastructure project activity as well as continued efforts by construction companies to contain their costs were the main factors cited behind the continueddecline in employment.

• Growth in wages continued in May, and at a higher rate, with the wages sub-index increasing by 2.2 points to 59.1 points. This was the highest reading for this sub- index in four months.

INPUT COSTS AND SELLING PRICES

• Input price inflation remained elevated in May, although the input costs sub-index fell by 2.3 points to 66.1 points, signalling a moderation in the rate of growth in costs.

• Reflecting the highly competitive market environment, selling prices continued to contract in May. The rate of contraction was, however, slightly slower than in April with the selling pricessub-index rising by 1.0 point to 48.3 points.

• The ongoing gap between these two pricing sub-indexes highlights the continuing pressures on the profit margins of construction businesses, amid rising cost burdens and a stronglycompetitive tender pricing environment.