Australia's construction sector is in a spot of bother

Photo: Buddhika Weerasinghe/ Getty Images.

Australia’s construction sector contracted sharply in March, with activity levels across residential, commercial and engineering all deteriorating compared to levels seen in February.

The AI Group-HIA performance of construction index (PCI) — akin to a PMI report — fell 0.9 points to 45.2, marking the fastest contraction seen in 13 months.

The PCI measures changes in activity levels from one month to the next. Anything above 50 signals growth, while anything below that level means contraction — so the higher the number the better.

At 45.3, it’s a pretty horrible result. The chart below, supplied by the Ai Group, reveals the deteriorating trend.

The weakness in March further is underlined by the table below, again supplied by the Ai Group. It shows the internal movements in the surveys components compared to February and the 12-month average. There’s a lot of red and sub-50 readings throughout.

Activity levels in housing and engineering construction contracted at a faster pace while growth in apartment and commercial construction slowed sharply compared to one month earlier.

Adding to concern, the contraction in the sector would be significantly steeper without growth in apartment construction, an area that has caused some angst recently given warnings over potential oversupply in some major urban centres leading to price declines.

Tighter restrictions on investor lending and higher interest rates are also being felt, further clouding the outlook for apartment construction moving forward.

In terms of the activity subindices, new orders continued to decline, albeit at a slower pace, while firms shed workers at the fastest pace seen in 15 months.

“With new orders across the sector also falling, the immediate outlook for construction is for further contraction,” said Peter Burn, Ai group head of policy.

That downbeat assessment was replicated by Geordan Murray, an economist at the HIA.

While there is a good pipeline of work that should sustain an elevated level of residential activity throughout the first half of 2016, the falls in the PCI indexes for houses and apartments imply residential activity may ease in the latter part of the year,” says Murray.

“This is a concern because the ongoing contraction in mining-related work still has a way to go yet. It is unlikely that a pick-up in conditions in other sectors will fully offset the contraction in mining investment over the next few years, but we need to give non-resource businesses the best possible chance. Bolstering business confidence is the key.”

The PCI completes the trio of March activity reports released by the Ai Group. The saying the good, the bad and the ugly comes immediately to mind.

Manufacturing activity grew at the fastest pace in 12 years while activity in the services sector contracted, albeit at a marginal rate. The PCI is the undisputed “ugly”.

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