Australia's construction sector is booming in early 2018

There’s a lot of development going on. Photo: Joern Pollex/ Getty.
  • Activity levels across Australia’s construction sector have been improving for over a year
  • The strength in February was led by strong results for residential construction
  • Despite boom-time like conditions, construction firms are reporting increased margin pressures

Activity across Australia’s housing and apartment construction sectors improved sharply last month, fitting with recent underlying strength in Australian residential building approvals.

And combined with ongoing strength in engineering and commercial construction, it all points to a sector that is enjoying a strong start to 2018.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) rose 1.7 points to 56.0 in January, leaving it at a three-month high.

The PCI measures perceived changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 56.0, activity levels not only improved in February, they did so at a faster pace than January.

The Ai Group reports that activity levels have now improved in each of the past 13 months.

Source: Ai Group

Helping to fuel that improvement, the group said activity levels improved at a faster pace in three of the four sub-sectors surveyed in February.

“House building was the strongest performing area of construction activity in February with its rate of growth lifting solidly due to an upturn in demand and a significant backlog of work,” the Ai Group said.

“Activity in the apartment building sector also showed improvement, expanding at a relatively robust rate after broadly stable conditions over the previous two months.

“House building respondents commented on an increase in customer enquiries in February and a continuation of relatively firm first home buyer activity.”

Along with a sharp improvement in residential construction, the group said engineering firms reported further momentum amid reports of new tender wins and continued support from an expanding pipeline of transport infrastructure projects.

Activity levels also improved for commercial construction firms, although the overall pace was slightly slower than a month earlier.

This table from the Ai Group shows how each sub-sector fared in February compared to both January and the average of the past 12 months in trend terms.

Source: Ai Group

Suggesting that the momentum seen in recent months will continue in the period ahead, the new orders subindex — a lead indicator on future activity levels — improved modestly, lifting by 0.1 points to 51.9.

“New orders lifted strongly in the house building sector and returned to positive territory in the engineering construction sector,” the Ai Group said.

“However, commercial builders experienced slower growth in new orders in February, while demand conditions in the apartment building sector were largely stable in the month.”

Like the headline PCI, a reading above 50 indicates that activity levels improved from one month earlier.

With activity levels strengthening across all sectors, employment growth also accelerated from what were already high levels.

“The employment subindex rose by 0.8 points to 58.8 points, indicating a slightly faster rate of growth,” the group said.

“Rising employment reflects the healthy level of work at present and the need for businesses to ensure sufficient resources are in place to meet future demand.”

With demand for workers increasing, firms also reported another large increase in wage growth during the month.

While good news for workers, the Ai Group said that contributed to increased margin pressures for firms.

“The input prices subindex registered 77.0 points in February — an increase of 2.6 points from January — indicating that cost pressures in the construction of building projects lifted during the month,” it said.

“Elevated cost pressures are being driven by robust demand for construction materials, escalating energy input costs and supplier price hikes related to strength in commodity prices.”

In contrast, the selling price subindex fell by 6.2 points to 52.7, suggesting that pressure rises in wages and other input costs are not being passed on in full.

“The widening gap between these price series demonstrates that strong pressures on profit margins persist for businesses in the construction industry,” the Ai Group said.

“This is consistent with reports of a highly competitive quoting and tendering environment.”

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