Turf QLD Industry Alert |PERFORMANCE of CONSTRUCTION INDEX JULY 2015.

AUSTRALIAN INDUSTRY GROUP/ HOUSING INDUSTRY AUSTRALIA:

PERFORMANCE of CONSTRUCTION INDEX JULY 2015.

Respondents to the Australian PCI® reported an ongoing lack of tender opportunities across the commercial, industrial, engineering and public sectors, while prices and margins came under further pressure from intensifying competition among businesses. Residential builders from NSW and Victoria remain generally positive about their outlook, but respondents from other states, particularly SA and WA, expressed concern about their local residential building market and about weakening economic conditions and labour markets in those states.

KEY FINDINGS:

• The national construction industry contracted for a fourth month in July, as reducing activity in the engineering sector continued to outweigh strengthening activity across the residential building sectors. The seasonally adjusted Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI® ) increased by 0.7 points to 47.1 points in July, signalling a slower pace of contraction than in June. The three-month moving average of The Australian PCI® was unchanged in July, at 47.1 points.
• All of the sub-indexes in the Australian PCI® , including activity, new orders, employment and deliveries from suppliers remained in contraction in July.
• Across the four sectors of the construction industry in the Australian PCI® , apartment building performed the best in July. Activity in this sector grew at its fastest pace since August 2014.
• Activity in the house building sector stabilised in July after three months of expansion.
• In contrast, engineering construction contracted for a 13th consecutive month in July, reflecting the ongoing reduction in mining-related investment and a declining pipeline of new projects.
• Commercial construction activity remained in contraction this month, reflecting prolonged weakness in non-residential building approvals and commencements.

ACTIVITY BY SECTOR:

• House building activity was stable in July, after expanding in June. The sector’s activity subindex declined by 1.7 points to 50.0 points this month. Conditions in the house construction segment have been patchy this year, expanding in three of the past six months.
• Apartment building activity lifted more strongly in July. The sector’s activity sub-index rose by another 9.0 points to 62.0 points, indicating the fastest pace of expansion since August 2014.
• The ongoing strength in residential construction activity followed a 5.5% q/q (+13.6% p.a.) increase in new residential building work done in Q1 2015 (ABS Building Activity) and signals continued growth in this key part of the local economy as we move into 2015-16.
• Engineering construction activity contracted for the 13th consecutive month in July, and at a steeper rate. The sector’s activity sub-index decreased further by 2.2 points to 43.0 points. This reflects further drops in new engineering construction and investment (which fell by 9.8% q/q and 21.7% p.a. in Q1 2015 in the ABS’ National Accounts), as resource-related construction declines and the pipeline of new major infrastructure projects continues to shrink.
• Commercial construction recorded a ninth consecutive month of contraction in July. The sector’s sub-index declined by a further 3.7 points to 45.2 points this month, indicating a faster pace of contraction in July

NEW ORDERS BY SECTOR:

• New orders in the house building sector contracted in July, with the sub-index falling by 4.1 points to 47.1 points. Orders for new houses have been volatile this year, having expanded in three of seven months. Similarly, ABS data indicate that private house building approvals increased by 2.7% over the year to June, but recorded zero growth that month (trend).
• New orders for apartment building stabilised in July following three months of contraction. The sub-index rose by 9.7 points to 50.1 points. This reflects the 2.4% m/m decline in private multiunit dwelling approvals (e.g. townhouses/flats/apartments) in June (ABS trend data). This deceleration in forward orders suggests that demand for new apartments may have cooled somewhat in recent months, although the existing pipeline of apartments to be built remains at an elevated level and is expected to support further apartment building activity in 2015-16.
• The engineering construction sector recorded a 19th consecutive month of decline in new orders, with the sub-index registering 42.4 points (up 3.7 points) in July. This trend is also evident in the 7.8% q/q (-26.4% p.a.) drop in the value of private engineering work ‘yet to be done’ (that is, in the pipeline) in Q1 recorded by the ABS (ABS Engineering Construction Activity). This indicates engineering construction activity is likely to fall further in 2015-16.
• Commercial construction recorded a fourth month of contraction in new orders, with the subindex declining by 1.7 points to 47.5 points. The latest ABS data confirm this weakness, with non-residential building approvals in June falling to their lowest level in five years.

NB: Each month Ai Group releases real-time performance indices for the manufacturing, services and construction sectors. These national indices are constructed from survey data collected from businesses Australia-wide, on a representative sample basis. The indices are seasonally adjusted ‘diffusion indexes’, based on a number of key activity indicators including sales, production, new orders, supplier deliveries and employment. This research examines the statistical relationship between the Australian PCI® and various ABS data series that are relevant to manufacturing activity. The findings show there is a strong relationship between the Australian PCI® and ABS data on Australian manufacturing. For several data series, the Australian PCI® leads the ABS data by several months, because it is released so much earlier and faster each month than the official data.