Turf QLD Industry Alert |AiGroup Performance of Construction Index

AiGroup Performance of Construction Index

September 2017.

 KEY FINDINGS

▪ The national construction industry expanded for an eighth consecutive month in September, although the pace of growth moderated slightly from August.

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) fell by 0.6 points to 54.7 points in September to signal a positive but somewhat slower rate of overall growth (readings above 50.0 points indicate expansion with higher numbers indicating a faster pace of expansion).

▪ Across the four sub-sectors in the Australian PCI®, engineering construction and house building continued to drive industry growth. Consistent with the ramp-up in government infrastructure spending, engineering construction activity was again robust in September with the sector expanding for a sixth consecutive month. The house building sector also expanded solidly and at a rate that was broadly unchanged from August.

▪ Commercial construction activity remained stable in September although new orders continued to hold at relatively firm levels. In contrast, apartment building fell further into negative territory with the sector’s activity sub-index contracting at is sharpest rate in seven months.

Australian PCI® data for September showed that both activity and new orders continued to rise, although rates of growth moderated in comparison with August. In line with the sustained growth in aggregate industry demand and activity, deliveries from suppliers expanded at their highest rate in three years. Businesses also lifted their workforces with employment increasing at its second highest pace in eight months.

▪ Respondents to the Australian PCI® were generally positive in their assessment of house building activity, citing relatively solid demand conditions and a high degree of support from on-going projects. However, reports from apartment builders pointed to a further softening in activity due to weaker new orders, a reduction in investor activity and the completion of some major projects. The rise in engineering construction was again linked to the upturn in non-mining infrastructure as the roll-out of major new road and rail projects gathers pace.

CONSTRUCTION ACTIVITY AND CAPACITY

The activity sub-index registered 52.6 points in September.

▪ This was 1.4 points below the level of the previous month, signalling a slower pace of growth in activity compared to August. However, it marked the eighth consecutive month of expanding industry activity and coincided with continued growth in new orders.

▪ The easing in overall activity growth was due to a slight easing in growth conditions in engineering construction combined with a further contraction in apartment building activity. Readings on activity in the house building and commercial construction sectors were broadly in line with those recorded in the previous month.

▪ The rate of capacity utilisation stood at 77.7% across the construction industry. Although this was unchanged from August, it was 1.3 percentage points above the 12-month average of 76.4 points.

ACTIVITY BY SECTOR

House building activity remained solid in September. The sector’s activity sub-index registered 56.6 points in September, up marginally by 0.1 points from August. It was also the sector’s eighth expansion in activity in the past nine months in line with expanding new orders over most of this period.

▪ Apartment building activity dropped further into negative territory with the sector’s sub-index registering 41.4 points in September, down 3.3 points from August. This was the lowest activity reading for the sector in 11 months.

▪ Engineering construction activity maintained strong growth in September, albeit at a slower pace with the sector’s activity sub-index decreasing by 1.1 points to 56.9 points. This marked the sixth consecutive month of expansion in engineering construction activity. It also follows the 21.7% q/q (+19.0% p.a.) seasonally adjusted increase in the value of engineering construction work done in Q2 (ABS Engineering Construction Activity).

▪ Commercial construction was broadly unchanged in September with the sector’s sub-index lifting by just 0.1 points to 50.3 points, signalling a near stabilisation in activity for a second consecutive month.

NEW ORDERS BY SECTOR

▪ New orders in the house building sector increased at a slower rate in September with the sub-index falling by 3.6 points to 53.5 points. Despite this moderation, September marked the eighth consecutive month of growth in new orders, indicating that housing construction is likely to remain relatively firm in coming months amid a solid backlog of work.

▪ In the apartment building sector, new orders continued to contract in September, albeit at a slower rate. After dropping sharply in August, the sector’s sub-index increased by 2.5 points to 46.3 points in September.

▪ New orders expanded for a fifth consecutive month in the commercial construction sector consistent with rising approvals across various major building categories including accommodation, offices and industrial buildings. The rate of growth also lifted slightly in September with the sector’s sub-index increasing by 0.7 points to 54.8 points.

▪ In the engineering construction sector, new orders exhibited a relatively solid pace of growth in September. However, the sector’s sub-index decreased by 7.6 points to 57.0 points in the month, signalling a slower pace of expansion following the 10-year high rate of growth reached in August. This continued expansion is consistent with businesses noting increased success in acquiring new contracts for future construction work in areas outside of mining, including transport and other public-sector infrastructure.

INPUT COSTS AND SELLING PRICES

The Australian PCI® input prices sub-index registered 72.5 points in September. This was an increase of 2.0 points from August, indicating that cost pressures in the construction of building projects lifted during the month. This increase in cost pressures was driven by robust demand for construction materials, escalating energy input costs and supplier price hikes related to higher commodity prices.

▪ The selling prices sub-index in the Australian PCI® increased by 2.4 points to 59.6 points in September. This suggests that the pressure on input prices from rises in wages and other input costs are being passed on, although not broadly given strong market competition.

▪ The on-going gap between these price series in the Australian PCI® indicates that profit margins remain under pressure for businesses in the construction industry. This is consistent with reports of a highly competitive quoting and tendering environment.

NB: An Australian PCI® reading above 50 points indicates construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.