Australia's construction sector just slowed suddenly as new orders dry up

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Australia’s construction sector lost a bit of momentum in December with activity levels improving at the slowest pace since April 2017, according to data from the Australian Industry Group (Ai Group).

The group’s Performance of Construction Index (PCI) — a measure of activity levels across Australia’s construction sector — fell 4.7 points to 52.8 points last month in seasonally adjusted terms, continuing to decelerate from the record-high level of 60.5 points struck in July 2017.

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 52.8, activity levels improved at the slowest level in over six months in December. While seemingly a disappointing result, it must be remembered that activity levels have now improved in each of the past 11 months.

Source: Ai Group

According to the Ai Group, the moderation was led by a slowdown in engineering and housing construction, managing to offset an improvement in the apartment sector.

“Across industry sub-sectors, engineering construction and house building remained the strongest performing areas of construction activity in December. However, the pace of activity growth in both sectors was well down on the solid increases recorded in November,” it said.

“The rate of expansion in commercial construction was also slower in the month, although December marked the sector’s eighth consecutive month of stable or expanding activity amid stronger property investor demand and improving business conditions more generally in 2017.”

Helping to partially offset the slowdown in other areas, the group said activity in the apartment sector improved following several months of weakness.

“Apartment building activity returned to positive territory after contracting for four consecutive months, although the overall rate of expansion in December was marginal,” it said.

This table from the Ai Group shows how each sector fared in December compared to one month earlier.

Source: Ai Group

Activity levels improved in all four sectors monitored, although most saw a slower improvement than a month earlier.

Like the headline PCI, most of the survey’s activity subindices also weakened during the month, especially the new orders measure which recorded its weakest reading in nine months.

“The renewed weakness in new orders points to the likelihood of a further easing in overall industry activity levels at the start of 2018,” the group said.

“Weighing heavily on overall demand conditions in December was a sharper fall in apartment building new orders. December also saw slower rates of new orders growth across the house building, engineering and commercial construction sectors.”

Softer readings were also recorded for employment, deliveries and capacity utilisation compared to November, fitting the broad-based slowdown seen across the sector.

Creating further headwinds for activity levels moving forward, input prices continued to increase substantially faster than selling prices, creating margin pressures for construction firms.

“The widening gap between these price series indicates that profit margins are coming under increased pressure for businesses in the construction industry,” the group said.

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

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