Australia's construction sector just grew for the first time in 5 months

Photo: iStock

Australia’s construction sector expanded for the first time in five months in February.

The pace of improvement was the strongest since mid-2016, led by strength in home, commercial and engineering construction that helped to offset ongoing weakness in the apartment sector.

The Ai Group’s Performance of Construction Index (PCI) jumped by 5.4 points to 53.1 last month, leaving it above the 50 level that separates expansion from contraction.

The PCI measures changes in activity levels across Australia’s construction sector from one month to the next, and ranges from a score of 0 to 100.

50 is deemed neutral, with anything above this level indicating that activity levels are expanding. A reading below 50 suggests activity levels declined. The distance from 50 indicates how quickly activity levels improved or declined compared to a month earlier.

So after contracting in late 2016 and in January this year, activity levels across the sector improved noticeably in February.

Australia PCI. Source: Ai Group

There was also evidence that the handover from Australia’s high-rise construction boom to other sub-sectors may be finally taking place.

“House building recorded a strong resurgence in February with activity expanding at its highest rate since June 2016,” said the Ai Group.

“Stronger conditions were also evident in commercial and engineering construction with activity in both sectors lifting into positive territory after declines over the previous five and four months, respectively.”

In comparison, the subindex measuring apartment building activity fell to 46.1, marking the sixth consecutive month that activity levels had weakened.

“House building respondents commented on an increase in customer enquiries in February and a high degree of support from on-going projects. Investor interest in the housing market was also generally seen to have remained solid in February,” it said.

The rebound in engineering construction was attributed to an improving inflow of infrastructure works, particularly road and rail projects in the eastern states.

This table from the Ai Group shows the internal movements within the February PCR report.

Source: Ai Group

With three of the four sub-sectors seeing activity levels improving during the month, it came as no surprise that most of the activity sub-indices also expanded strongly.

“The activity sub-index expanded at its highest rate in almost 2.5 years. In addition, businesses increased their workforces, with employment rising for the first time in four months,” the Ai Group said.

“Conditions in February were also supported by an increase in deliveries from suppliers and an upturn in the new orders sub-index which returned to growth after six months of contraction.”

The pickup in new orders is particularly pleasing given it is deemed to be a lead indicator on future activity levels across the sector.

The Ai Group said that result reflected a solid recovery in new orders in the house building sector and a return to modest growth in intakes of new orders in the engineering construction sector.

Although highly volatile, the sub-index on home building hit the highest level since September 2014. Casting some doubt as to whether that strength can last, private-sector housing approvals have been trending lower in recent months.

Harley Dale, chief economist at the HIA, said that the February result suggests that “there is still life left in Australia’s new home building sectors”.

“The gem in today’s result — for manufacturers, suppliers, sub-contractors, builders and the many other market participants — is the relatively strong showing for detached housing,” he said.

“It supports our view that new home construction activity will hold up very well in the short term, after which there will be a marked decline in medium/ high density construction relative to detached housing.”

The PCI rounds off a mixed performance from Australia’s major sectors in February. The manufacturing sector saw activity levels improve at the fastest pace in 15 years while those in the services sector contracted for the first time since September 2016.

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