Australian construction just had a big downturn

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Activity levels across Australia’s construction sector contracted sharply last month, completing a trio of disappointing PMI readings for the nation in December.

The Ai Group-HIA performance of construction index (PCI) fell 3.9 points to 46.8, signalling the fastest pace of contraction seen across the sector since June last year.

Like all PMI gauges, a reading of 50 is deemed neutral, indicating that activity has neither accelerated nor decelerated during the month. A figure above 50 signals an expansion while anything below signals that activity levels have declined.

At 46.8, it was the first contraction in activity recorded in five months.

The sharp decline was led by a 14.7 point drop in the apartment subindex, falling by a whopping 14.7 points to 54.3.

It was the weakest expansion recorded in six months.

While activity levels are still accelerating, the sharp slowdown adds to evidence – as seen in the ABS’ November building approvals report released yesterday – that activity levels in high-density construction are now starting to cool after what has been a frenetic two years of activity.

Apartments aside, there was a strong 4.6 point bounce in the detached housing subindex which rose to 52.6.

Reflecting to the two-tier nature of Australia’s construction sector at present, the surveys gauges on commercial and engineering construction slumped to 40.0 and 41.2 respectively, indicating that activity in these areas is contracting sharply.

Pointing to the likelihood that further weakness may arrive in the months ahead, the surveys new orders subindex slid 5.5 points to 44.3.

As a lead indicator for future levels of activity, this is an unwelcome development.

The table below, supplied by the Ai Group, reveals the internal movements within the index in December.

Commenting on the result, HIA Economist Geordan Murray believes that residential construction looks set to soften in the year ahead.

The Australian PCI result for December 2015 reaffirms the view that conditions for residential building, in both the house and apartment building, look set to soften in 2016. The Australian PCI activity sub-indexes show that both house building and apartment building expanded in December 2015, which reflects the ongoing work on projects that are already in the pipeline. With falls in the new orders sub-indexes to sub-fifty levels, this situation implies new projects may not be entering the pipeline as quickly as existing work is being completed.

Nevertheless, there is still a very large volume of residential building work yet to be done which should sustain an elevated level of activity throughout the first half of 2016 despite the softening in new orders in late 2015.

While there is little doubt that the near-term outlook for residential construction will remain strong given the enormous surge in building approvals seen in the second half of last year, it’s clear that the risk at present is that some of these approvals, particularly for high-density apartments, many never reach the construction stage.

House price growth is moderating, investor financing is contracting while auction clearance rates continue to trend lower, all suggesting that demand is weakening.

Should that trend continue, it suggests that the expected boost to economic growth this year from residential construction may end up being significantly less than what forecasts currently predict.

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