Activity levels across Australia's construction sector continue to weaken

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While Australia’s manufacturing and services sectors expanded modestly last month, the same can’t be said for the nation’s construction sector.

It continued to contract, fitting with recent weakness in new home sales and building approvals data.

The Ai Group’s Performance of Construction Index (PCI), produced in conjunction with the Australian Housing Industry Association, rose by 0.7 points to 46.6, leaving it below the 50 level for a second consecutive month.

The PCI, like the better known PMI reports for manufacturing, measures changes in activity levels across Australia’s construction sector from one month to the next. A reading above 50 indicates that activity levels are improving while sub-50 levels suggest they are contracting.

At 46.6, its says that activity levels continued to decline in November, albeit at a slightly slower pace than October.

Source: Ai Group

The weakness was broad-based in nature.

All construction subsectors — housing, apartments, commercial and engineering — saw activity levels weaken in November.

“Apartment building declined for a third consecutive month, although at a rate that was slower than in October. House building recorded a fourth month of contraction, highlighting the sector’s recent softening from more robust mid-year activity levels,” said the Ai Group.

According to the report, residential builders reported an easing in customer enquiries and lower sales in November. However, that was partially counteracted by “relatively firm” investor activity over the month.

The news was even more disappointing for engineering construction — one of the pillars many hope will help to fuel economic growth next year thanks to increased public sector investment — with the subindex falling further into negative territory, recording its lowest reading in over a year.

The Ai Group said that engineering construction firms reported a further winding back in mining-related investment which outweighed strengthening demand from new infrastructure work.

Commercial construction fell for a fourth month, although, at 48.7, it recorded the slowest contraction of all sectors over the month.

Reflective of the broad based weakness, the employment subindex fell back into contractionary territory, dropping 4.8 points to 45.4.

New orders, a lead indicator on future levels of activity across the sector, continued to decline, suggesting that activity levels may remain weak for some time yet.

Source: Ai Group

According to Peter Burn, head of policy at the Ai Group, “while there is some encouragement in the form of transport infrastructure activity, particularly in the south-east corner of the country, this is being overshadowed by the continuing decline of mining-related construction and the retreat of residential building from the unusually high levels evident over the past couple of years”.

“At a whole-of-economy level, the retreat of the construction sector highlights the need for new sources of growth to emerge,” he said.

Something that is likely to receive plenty of attention today with the release of Australia’s Q3 GDP report. Economists are forecasting real GDP to contract by 0.1% — the first decline in five years — leaving the year-on-year rate at 2.2%.

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