Australia’s construction sector remained weak in December, led by residential building

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While Australia’s services and manufacturing sectors saw activity levels surge in December, the same can’t be said for the nation’s construction sector.

They deteriorated for a third consecutive month, led by weakness in residential construction.

On that evidence it appears that Australia’s residential building boom may have peaked far sooner than many previously anticipated, something markets will get further information on today with the release of Australian building approvals data for November.

The Ai Group Performance of Construction Index (PCI), produced in conjunction with Australia’s Housing Industry Association (HIA), came in at 47.0 in December, up fractionally on the 46.6 level reported in November.

Like the better-known PMI reports, the PCI measures changes in activity levels across Australia’s construction sector from one month to the next. It ranges from 0 to 100, with a reading of 50 indicative that activity levels were unchanged from a month earlier.

Anything below 50 suggests that activity levels deteriorated, with the distance from 50 indicative of the scale of the decline seen.

Source: Ai Group

According to the Ai Group, all four industry sub-sectors contracted during the month with the steepest declines reported in the survey’s residential components, housing and apartments.

“House building declined for a fifth consecutive month as activity in the sector moderated further from robust mid-year levels. Apartment building also continued to contract, although the sector’s pace of decline was the slowest in three months,” said the Ai Group.

Those performance were also mirrored by commercial and engineering construction, the latter a particularly disappointing outcome given optimism over a public-sector led boost that was expected to offset weakness in residential construction in the period ahead.

The table below shows the performance of all four sub-sectors in December, along with the survey’s measures on activity levels. The Ai Group uses three-month moving averages to reduced month-to-month volatility in these components.

Source: Ai Group

The survey’s overall activity subindex came in at 47.7, a figure that was up 2.8 points from November but still below the 50 level separating expansion from contraction.

Adding to evidence that construction activity may have already peaked, the new orders subindex — a forward indicator on activity levels in the future — contracted for a fifth consecutive month, coming in at 48.6.

In particular, the Ai Group said that new orders for apartment construction remained weak.

“New orders contracted for a fourth month with the sector’s sub-index registering 44.7 points in December. This was an increase of 5.5 points from November, signalling a slower pace of contraction,” it said.

“However, the continued fall in new orders in December is another sign of softer demand for new apartment developments, relative to recent peak levels in mid-2016.”

Elsewhere, new orders for housing were largely unchanged, while those for engineering and commercial registered modest declines from a month earlier.

Mirroring the slowdown in overall activity levels, the survey’s employment subindex slumped 1.9 points to 43.5 — indicating jobs were lost across the sector at a decent clip in December — while input costs accelerated while at the same time selling price growth slowed.

“The wide gap in these pricing series indicates that profit margins remain under intense pressure for businesses in the construction industry,” said the Ai Group.

“This is reflected also in widespread reports from respondents of a highly competitive tender pricing environment across the industry.”

In light of the continued weakness in the PCI report, markets will now be watching the release of Australia’s building approvals report for November, scheduled for release at 11.30am Sydney time on Monday.

In October, approvals slumped by 12.6% to 16,279 in seasonally adjusted terms, according to the ABS, following a 9.3% drop in September.

It was the smallest monthly total since September 2014, and the largest percentage drop in 11 months.

Private house approvals fell by 3.4%, more than reversing the 1.5% increase reported previously, leaving the year-on-year drop at 5.7%.

Overshadowing that decrease, and explaining the drop in total approvals, those for dwellings excluding houses — almost entirely apartments — dropped by an enormous 24.8% from September.

It left approvals in this category down 42.6% from the levels of a year earlier.

Any continuation in that trend in November will only add to concerns that Australia’s residential building boom may have peaked sooner, and smaller, than what many previously anticipated.