Australia's construction sector is strengthening as non-residential work soars

LEON NEAL/AFP/Getty Images
  • Activity levels continue to strengthen across Australia’s construction sector./strong>
  • The Ai Group said the improvement was driven by booming growth in non-residential construction.
  • New orders are increasing for both non-residential and residential work, suggesting that activity levels will remain strong in the period ahead.

Activity levels across Australia’s construction sector continue to strengthen, underpinned by surging growth in non-residential work.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) rose 1.2 points to 57.2 in March in seasonally adjusted terms, leaving it well above the levels seen in prior years.

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 57.2, activity levels not only improved in March, they did so at a faster pace than February.

The Ai Group reports that activity levels have now improved in each of the past 14 months, a prolonged period of growth never before seen in the 13-year history of the survey.

The Ai Group said three of the four industry sub-sectors saw activity levels strengthen during the month, led by spectacular growth in commercial and engineering work.

“Commercial construction activity drove growth in industry conditions in March,” it said.

“The sector expanded at its highest rate in [over 12] years reflecting firm property investor sentiment and improving business conditions more generally.

“Engineering construction also gained further solid momentum in March amid reports of new tender wins and on-going support from major infrastructure projects.”

Along with strong growth in non-residential work, activity levels were also boosted by ongoing strength in housing construction.

“House building activity expanded for a tenth month running in line with continued strength in demand, although growth was below the solid seven-month high rate of increase recorded in February,” the Ai Group said.

Those results helped to offset renewed weakness in construction activity over the month.

“Activity in the more volatile apartment building sector weakened, falling back into slight negative territory following a strengthening in February,” the group said.

“Apartment building respondents commented on a reduction in investor activity and pockets of over supply that were having a constraining influence on activity.”

This table from the Ai Group shows how each individual sub-sector, along activity indexes, fared in March compared to February and the average seen over the past year. The results are presented in trend form to help reduce month-to-month volatility in the data.

Source: Ai Group

Overall capacity utilisation across the sector also improved over the month, lifting to 79.3%, the second-highest level in the past nine months.

Suggesting that capacity utilisation may increase in the months ahead, the new orders subindex — a lead indicator on activity levels in the future — surged by 8 points to 59.9 points, the highest level in eight months.

“This firming in new orders points to a positive outlook for overall industry activity in coming months,” the Ai Group said.

“New orders expanded at a higher pace in the engineering, apartment building and commercial construction sectors while the housing sector experienced a steady but solid inflow of new orders.”

So not only are new orders growing strongly, the improvement is broad-based, including for apartment work.

The recent improvement can be seen in the chart below.

Source: Ai Group

The remaining activity subindices were solid if not spectacular with employment, wage growth and deliveries growing at a slower pace than February.

However, even with boom-like conditions in non-residential construction, the Ai Group said margins for firms remained under pressure as input costs continued to grow faster than final selling prices.

“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,” it said.

“Pressure on input prices from rises in wages and other input costs are being passed on in part, although still not broadly given strong market competition.”

The Ai Group said this “demonstrates that strong pressures on profit margins persist for businesses in the construction industry”, consistent with “reports of a highly competitive quoting and tendering environment”.

So while there’s plenty of work on offer, competition to suffice that demand remains intense.

Still, along with strength in manufacturing and service sector activity levels over the same period, the broader theme from the latest batch of PMI reports suggest the Australian economy continued to strengthen in March, an outcome consistent with recent views communicated by the Reserve Bank of Australia (RBA).

It also suggests that conditions in the National Australia Bank’s monthly business survey for March — released on Tuesday — will remain at elevated levels.

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