Australia's construction sector continues to strengthen, buoyed by engineering and housing

Photo by S. R. Gaiger / Topical Press Agency / Hulton Archive / Getty Images

Australia’s construction sector continues to chug along nicely with strength in home building and engineering works continuing to offset weakness in the apartment sector.

The latest Performance of Construction Index (PCI) from the Ai Group fell 0.6 points to 54.7 in September, leaving it at the lowest level since April.

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 54.7 in September, activity levels improved at a decent pace last month, just not as fast as August.

The index has now held above the 50 level in each of the past eight months.

Source: Ai Group

By sector, the Ai Group said that the strength was yet again driven by home and engineering construction, offsetting continued weakness in high-density housing.

“Engineering construction and house building continued to drive industry growth,” the Ai Group said.

“Consistent with the ramp-up in government infrastructure spending, engineering construction activity was again robust in September with the sector expanding for a sixth consecutive month.

“The rise in engineering construction was again linked to the upturn in non-mining infrastructure as the roll-out of major new road and rail projects gathers pace.

“The house building sector also expanded solidly and at a rate that was broadly unchanged from August,” it added.

According to recent data from the ABS, private sector housing approvals rose by 3.1% to 9,797 in the 12 months to August, an outcome that mirrors the strength in the PCI report.

“Respondents were generally positive in their assessment of house building activity, citing relatively solid demand conditions and a high degree of support from on-going projects,” the Ai Group said.

Strong levels of population growth, particularly in Australia’s eastern states, has undoubtedly underpinned demand.

However, while home building continued to impress, activity levels across the apartment sector continued to decline, mirroring persistent weakness in the ABS’ building approvals report.

“Apartment building fell further into negative territory with the sector’s activity sub-index contracting at is sharpest rate in seven months,” said the Ai Group.

“Reports from apartment builders pointed to a further softening in activity due to weaker new orders, a reduction in investor activity and the completion of some major projects.”

Private sector dwelling approvals excluding houses fell by 29.2% to 8,496, according to data released by the ABS. As a lead indicator, that helps to explain the weakness in the PCI report.

However, there’s recently been some sign of stabilisation in approvals in this category, hinting that the downturn may moderate, or even possibly reverse, in the period ahead.

Commercial construction was largely unchanged from a month earlier, coming in at 50.3.

Source: Ai Group

Hinting that activity levels across the broader sector will remain firm in the months ahead, the new orders subindex — a lead indicator on future activity levels — came in at 53.3 in September, down 4.2 points from August.

While a decline, this indicates that new orders still grew, just at a slower pace.

The Ai Group said that orders increased in all sectors aside from the apartment sector.

“New orders in the house building sector increased at a slower rate in September with the subindex falling by 3.6 points to 53.5 points,” it said, adding that orders have now grown in each of the past eight months.

It was a similar story for engineering and commercial work which continued to grow at a decent clip.

The engineering subindex decreased by 7.6 points to 57.0 points, falling back from the 10-year high level of August.

“This continued expansion is consistent with businesses noting increased success in acquiring new contracts for future construction work in areas outside of mining, including transport and other public-sector infrastructure,” the Ai Group said.

New commercial orders also grew for a fifth consecutive month, rising by 0.7 points to 54.8.

“[This is] consistent with rising approvals across various major building categories including accommodation, offices and industrial buildings,” it said.

New orders for apartment construction bucked the trend, coming in at 46.3. While a decline, it was slower than the pace reported in August.

With current and future activity remaining at healthy levels, employment, wages, deliveries, and prices all increased from a month earlier.

Outside of the weakness in apartment construction, something that was widely expected following an unprecedented high-rise building boom in recent years, the remainder of the PCI report offered few signs of a pending collapse in activity levels in the months ahead, said Peter Burn, head of policy at the Ai Group.

“While apartment building is winding down and commercial construction was flat, both engineering construction and house building continued to grow relatively strongly in September. Construction sector employment lifted again and wages growth accelerated in the month,” he said.

“With new orders still on the rise for the sector as a whole, the outlook over the next few months is positive even though the indications are for further contraction in the apartment sub-sector.”

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