Last month saw a HUGE contraction in Australian apartment construction

There’s a lot of development going on. Photo: Joern Pollex/ Getty.

Australia’s construction sector is contracting. Again.

The latest HIA-Ai Group Performance of Construction Index (PCI) fell by 4.1 points to 46.7 in May, leaving the index below the 50 level that indicates activity levels are deteriorating.

Like better recognised PMI gauges, the PCI measures changes in activity levels across Australia’s construction sector from one month to the next. A 50 reading is deemed neutral, meaning that activity levels were unchanged compared to the previous month.

Anything below 50 signals that activity levels are contracting with anything above 50 indicating that activity levels are expanding.

In other words, the higher the better.

Mirroring the slump in the headline index, activity levels contracted in three of the four construction sub-sectors surveyed, led by a sharp contraction in apartment building.

It tanked by 8 points to 41.5, signalling that activity levels contracted at the sharpest pace seen since August 2013.

It’s something that is at odds with recent building approvals and new home sales data which have rebounded strongly in recent months. It will also do little to dispel concerns expressed by some parties that a looming correction in apartment prices — particularly in inner-city locations in Melbourne, Brisbane and Sydney — is likely.

Like the performance from the apartment construction sector, activity levels across the commercial and engineering sectors contracted at a steeper pace, registering declines to 44.7 and 43.4 respectively.

House construction, at 57.6, was the only sector to expand, recording an enormous 12.4 point bounce compared to the level seen in April.

Like the performance of individual sectors, the survey’s individual activity subindices were also weak, particularly for new orders and employment.

The new orders subindex slumped by 6.1 points to 42.9, contracting at the fastest pace seen since February last year. This is seen as a lead indicator on future levels of activity across the construction sector, and indicates that activity levels may deteriorate even further in the months ahead.

The survey’s employment index fell 5.54 points to 49.0, indicating that staff numbers were reduced in May, while the gauge measuring wages slid 3.4 points to 57.4.

Input prices, at a whopping 67.8, was the only activity subindex to expand during the month.

As a result, capacity utilisation across the nation’s construction sector fell by 1.5 points to 74.7%.

The table below, supplied by the Ai Group, breaks down the May survey by individual sector and category.

“Despite a return to expansion in the house-building sub-sector, the broader construction industry missed a gear in May with declines in the apartment building and commercial and engineering construction sub-sectors,” said Peter Burn, head of policy at the Ai Group.

“With new orders lower across all parts of the industry in May, the immediate outlook is for further weakness.”

However, despite the weakness in the May report, Burn suggests that there’s still reason for optimism across the sector.

“There are, nevertheless, some emerging signs of a pick-up in non-mining related engineering construction with a growing pipeline of infrastructure projects,” he says.

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