Australia’s construction sector is on a major hiring spree

Photo: Reuters/Arnd Wiegmann.

Australia’s construction industry enjoyed a strong start to the year with broad based improvements recorded in January, including for apartment construction.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) rose 1.5 points to 54.3 in January, above the 50 threshold that indicates activity levels improved.

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 54.3, activity levels not only improved in January, they did so at a faster pace.

Activity levels have now improved in each of the past 12 months — a clear sign that momentum is continuing to build across the sector.

Source: Ai Group

“January marked a full year of monthly growth in Australia’s construction sector,” said Peter Burn, Ai Group Head of Policy.

“Activity lifted across the industry with the strongest contribution coming from commercial construction. House builders and engineering constructors also reported healthy gains while apartment builders enjoyed a second consecutive month of relief from the falls in activity experienced over much of 2017.”

This table from the Ai Group shows the performance by individual sub-sectors, as well as measures on activity levels.

Like the headline PCI, a reading above 50 indicates an improvement on one month earlier.

Source: Ai Group

With activity levels continuing to strengthen, hiring levels grew strongly, lifting to the highest level seen in six months. Hiring has increased in the sector in each of the past nine months.

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

The strong increase in the employment subindex coincided with capacity utilisation across the sector lifting to 83.4%, the highest level ever seen in the decade-long history of the survey.

Linked to the employment surge and lift in capacity utilisation, the new orders subindex — a lead indicator on future activity levels — also rebounded after weakening slightly in December, pointing to a solid pipeline of work in the months ahead.

“New orders recovered in the apartment sector and expanded at a higher pace in the commercial construction sector,” the Ai Group said. “However, house builders experienced slower growth in new orders in January, while new orders in engineering construction contracted for a second consecutive month.”

For engineering, the powerhouse of Australian construction activity in 2017, the group said respondents reported that new tenders are becoming harder to secure than a year earlier.

“However, the general strength in new orders evident in 2017 — reflecting the solid pipeline of publicly funded infrastructure — should continue to support activity through 2018,” it said.

Reflecting growing capacity constraints, the input prices index still stood at 74.4 points in January, indicating robust demand for construction materials, escalating energy input costs and supplier price hikes related to stronger commodity prices.

At the same time, end prices grew at a far slower pace with the selling prices index rising fractionally to 58.9 points.

“This suggests the pressure on input prices from rises in wages and other input costs are being passed on in part, although not broadly given strong market competition,” the Ai Group said.

“The ongoing gap between these price series demonstrates that strong pressures on profit margins persist for businesses in the construction industry.”

So margins for the sector as a whole are coming under pressure, something that obviously will have consequences for profitability levels should it persist.

Following the release of strong readings on manufacturing and service sector activity levels in recent days, today’s report provides yet another indication that the Australian economy appears to be gathering strength in the early parts of 2018, building upon the improvement in the second half of 2017.