Australian construction levels collapse

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  • Activity levels across Australia’s construction sector deteriorated at the fastest pace in two years in October.
  • Housing, apartment and commercial construction all recorded steep falls in activity levels from a month earlier, an outcome only partially offset by continued strength in engineering work.
  • New orders for apartments plunged at the fastest pace in six years. New commercial work also fell sharply over the month.
  • Firms shed staff for a third consecutive month while margin pressures intensified even further.

Activity levels across Australia’s construction sector fell sharply in October, led by ugly declines in residential and commercial work.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) fell to 46.4 points in October in seasonally adjusted terms, down 2.9 points on the level reported in September.

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 46.4, it indicates that activity levels across the construction sector weakened for a second consecutive month, a result in stark contrast to what was seen throughout 2017 and earlier this year.

Ai Group

The pace of decline was the sharpest since October 2016.

As seen in the table below from the Ai Group, the activity readings for residential and commercial construction were horrible, declining at a faster pace than a month earlier.

Like the headline PCI, a reading below 50 indicates that activity level deteriorated during the month. The data is presented in trend terms to help smooth out volatility seen from one month to the next.

Ai Group

“House building respondents linked slower activity in October to tighter lending conditions, falling house prices and generally weaker home buyer sentiment,” the Ai Group said.

“Apartment builders indicated that activity continued to decline from recent peaks in response to falling investor demand, falling prices and excess supply in some markets.”

The news was just as dire for commercial construction during the month.

“Commercial construction remained in contraction with the sector’s activity index decreasing by 6.1 points to 43.7 points in October,” the Ai Group said. “This signalled the fourth consecutive month of declining commercial activity and the steepest rate of contraction in 18 months.”

Those results mirror recent weakness in Australian building approvals data released by the ABS, both for residential and non-residential work.

Suggesting conditions for residential and commercial construction may deteriorate further in the months ahead, new orders — seen as a lead indicator on activity levels in the future — also fell at a faster pace than a month earlier.

By individual subsector, the Ai Group said the headline drop largely reflected a plunge in apartment work which fell at the fastest pace since October 2012. New commercial work also fell heavily, sliding 9.1 points to 37.5 points.

The news was better for housing construction with new orders stabilising after falling sharply in the previous month.

Dire, right?

Well the headline results would have been significantly worse without continued strong growth in engineering construction, albeit at a slower pace than a month earlier.

“Engineering construction activity continued to expand in October, although at a slower rate, with the sector’s activity index decreasing by 10.7 points to 55.0 points,” the Ai Group said.

“This marked the sector’s 19th consecutive month of growth, mainly reflecting significant state government transport and related projects.”

So government spending, rather than from the private sector, mirroring similar results seen in new car sales in September.

While activity level for engineering firms remain firms, new orders declined marginally over the month, hinting that activity levels may cool further in the period ahead.

From a broader perspective, the Ai Group said firms cut staff numbers for a third consecutive month, a trend that will be worthwhile watching given construction is the third-largest employer in Australia behind healthcare and retail.

Despite declining employment levels, wages continued to grow at a decent pace across the sector, contributing to ongoing margin pressures for firms working operating in the sector.

The input prices index fell by 3.7 points to 72.4 points, indicating that cost pressures eased during the month but remained significant due to robust demand for construction materials, elevated energy input costs and price hikes for oil and other commodities,” the Ai Group said.

However, while inputs prices grew at a slightly less-brisk pace, selling prices fell sharply, highlighting the strong competition between builders.

“The ongoing gap between these price series indicates that profit margins remain tight for businesses in the construction industry,” the Ai Group said.

“Many respondents are indicating that cost pressures in the construction of building projects remain high due to robust demand for construction materials and elevated energy input costs and reports are rising about difficulties in filling skilled vacancies.

“These pressures are testing the capacity of the industry to effectively bid for new work.”

Make no mistake the October PCI is an ugly report, casting doubt as to whether the Australian economy will grow even faster in the coming year. This is a big part of the Australian economy, and right now it’s incredibly weak.

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