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This vital growth pillar for the Australian economy looks like it's getting even stronger

Victor Fraile/Getty Images

Of the few highlights in Australia’s September quarter GDP report, none stood out more than the strength in non-residential construction.

It was absolutely booming, helping to offset a very weak result from household consumption which grew at the slowest pace in close to a decade. On this particular occasion it was the economy’s saving grace, taking up the growth mantle from other parts of economy in the past.

The good news is that the strength in non-residential construction looks like it’s continued into the December quarter, at least based off the latest Performance of Construction Index (PCI) released by the Australian Industry Group (Ai Group) today.

In November, engineering construction saw activity levels improve at the fastest pace in over 11 years, benefiting from the continued roll-out of large-scale government infrastructure projects.

The fastest improvement in over 11 years, building upon what is already boom-time like activity levels at present.

Along with rapidly improving activity levels in housing and commercial construction, that contributed to the headline PCI jumping 4.3 points to 57.5 points — the fastest pace of overall improvement across the sector in four months.

Source: Ai Group

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.

The good news is that activity levels have now improved in each of the past 10 months, and not by a little but a lot.

And, importantly, it was not just engineering construction that drove the strong improvement.

“The industry’s buoyancy reflected on-going strength in engineering construction and house building activity combined with resurgent conditions in the commercial construction sector,” the Ai Group said, acknowledging this helped to offset continued weakness in the apartment sector.

“The rate of expansion in commercial construction lifted to its second highest level in [over] three years amid an increase in the number of projects entering the work pipeline.

“House building activity also strengthened due to continuing firm demand and support from a solid backlog of work.”

As seen in the table below from the Ai Group, this helped to offset ongoing weakness in apartment construction that was weighed down by fewer new orders and reduced investor demand.

Like the headline PCI, a reading above 50 indicates that activity levels improved from one month earlier.

Source: Ai Group

Along with the broad-based strength in November outside of the apartment sector, the activity subindices, shown in the right-hand side column in the table above, also impressed.

The new orders subindex rose 3.1 points to 56.7 points, the eighth increase in a row and the fastest improvement in three months.

“New orders expanded at stronger rates in the house building and commercial construction sectors, while growth was broadly unchanged in the engineering construction sector,” the Ai Group said. “In contrast, new orders in the apartment sector contracted for a fourth consecutive month.”

At 60.3 points, 57.9 points and 55.9 points respectively, the new orders measures for housing, commercial and engineering construction all bode well on the outlook for activity levels in the first half of 2018.

And with activity levels already strong and expected to remain that way given the pipeline of new work, firms upped their hiring levels and increased wages for workers in November, continuing the trend seen in previous months.

“November marked the seventh consecutive month of growth in employment and the ninth increase in the past ten months,” the Ai Group said.

“Rising employment continues to reflect overall growth in activity and new orders as respondents seek to boost operating capacity in response to current and expected work load requirements.”

And with demand for workers strengthening, so too are the wage levels being paid to workers.

“The pace of construction wages growth has remained relatively high during 2017 with the November reading broadly in line with the solid 12-month average of 62.7 points,” the group says.

“This is consistent with the investment upturn in transport infrastructure and other public works which has led to strong demand for construction workers and increasing difficulties in filling various skilled vacancies.”

While only isolated to parts of the construction sector, this will be music to the ears for the Reserve Bank of Australia who are banking on tighter labour market conditions to help spur on wage pressures across the broader economy.

Fitting with a sector that is performing strongly in the final throngs of 2017, construction costs and selling prices also increased, as did overall capacity utilisation across the sector.

It all paints a rosy picture on the outlook for housing, engineering and commercial construction as we head towards 2018.

Should those trends continue, it will provide a vital growth pillar to the Australian economy, potentially laying the platform for other sectors — such as households — to follow suit in the period ahead.

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