Construction activity in Australia is crumbling at rates not seen for several years

Tools down. Picture: Getty Images
  • Australia construction activity plunged at the fastest pace in nearly four years last month.
  • Apartment and housing construction recorded the fastest deterioration in six years. Commercial work also weakened for a fifth month.
  • New orders were either unchanged or fell from a month earlier, suggesting the weakness may get worse in the months ahead.

If the latest signals from the Australian construction sector are anything to go by, 2019 could turn out to be rough year for the broader Australian economy.

Activity levels plunged at the fastest rate in nearly four years last month, driven by an even steeper decline in the housing sector.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) fell to 44.5 points in November in seasonally adjusted terms, down 1.9 points on the level reported in October.

It was the weakest result since February 2015.

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 44.5, it indicates that activity levels across the construction sector weakened for a third consecutive month in November, and at a faster pace.

Ai Group

As the third-largest employer in Australia behind healthcare and retail, this is not a good result.

“A further lift in infrastructure activity was not able to offset steeper falls in residential construction sub-sectors in November,” said Peter Burn, Head of Policy at the Ai Group.

“Across the construction sector as a whole, activity, employment and new orders all fell in the month which was the third consecutive month of contraction in this important part of the economy.”

Like the headline PCI, the internals of the November report were ugly with activity and employment declining at faster rates than a month earlier. Capacity utilisation also plunged by 4.1 percentage points to 74.3%.

The speed of decline in activity levels was the steepest in over five years.

Ai Group

New orders, regarded as a lead indicator on activity levels in the future, also declined, albeit at a marginally slower rate than October.

Orders for houses, apartments and commercial work all fell, while those to build engineering projects were unchanged from a month earlier.

Margin pressures for construction firms also remained acute with input costs lifting at a faster pace while prices to end customers fell.

“Cost pressures remain high on wide industry basis due to robust demand for construction materials, elevated energy input costs and supplier price hikes related to strength in commodity prices. Selling prices continued to contract in November, albeit at a slower rate,” the Ai Group said.

“The ongoing gap between these price series demonstrates that profit margins remain tight for businesses in the construction industry. This is consistent with reports of a strong competition in securing work across the construction industry.”

Underlining just how bad conditions are in residential sector, activity levels for apartment and housing construction both declined at the fastest pace in six years.

“Apartment building activity contracted for an eighth consecutive month and at its sharpest trend rate in six years while the house building sector fell further into negative territory with its rate of decline also the most marked in six years in trend terms,” the Ai Group said.

The housing market downturn in Sydney and Melbourne is clearly taking its toll with the result casting doubt about a slow and steady decline in residential completions in the coming years, along with the outlook for the broader economy.

“The contraction in new orders suggests that the drag on economic growth from falling levels of home building could become more significant over the year ahead,” said Geordan Murray, HIA Acting Principal Economist, in relation to the result.

Commercial construction was also soft with activity levels deteriorating for a fifth consecutive month.

Only engineering construction — helped by public demand — registered an improvement in overall activity levels from October.

“This is consistent with the continuing strength in public sector engineering construction work which was at a near-record highs of $9.8 billion in Q3 2018,” the Ai Group said.

While that remains a bright spot, as indicated by the downturn in the headline PCI in recent months, even robust publicly-funded engineering work has not been enough to offset broader weakness across the construction sector.

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