Australia's construction sector remains stuck in the doldrums

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Conditions across Australia’s construction sector deteriorated for a fourth consecutive month in January, adding to signs that Australia’s residential building boom is now starting to ebb.

The Ai Group’s Performance of Construction Index (PCI), produced in conjunction with Australia’s Housing Industry Association, rose 0.7 points to 47.7 in January, remaining below the 50 level that points to weaker conditions for the sector.

The PCI, like PMI reading, measures changes in operating conditions across Australia’s construction sector from one month to the next. A reading of 50 is deemed neutral, with anything below this figure indicating that activity levels are contracting. The distance from 50 represents the scale of the deterioration or improvement seen during a particular month.

So at 47.7, activity levels continued to weaken, albeit at a slightly slower pace than what was the case in December.

Source: Ai Group

The Ai Group said that respondents indicated that soft conditions “were due to subdued overall demand conditions”, citing “fewer new tender opportunities and a lower volume of new work to replace end-of-year completed projects”.

By construction sub-sector, the Ai Group said that activity levels weakened for engineering and commercial construction, along with apartment building.

Housing construction activity, at 50.2, was relatively unchanged from the levels seen in December. It was also the first time in five months that activity levels in this sub-sector failed to deteriorate.

Despite the mixed performance across residential construction, survey respondents said slow market conditions were due to “soft new orders, lower housing sales and caution by prospective buyers”.

Suggesting that conditions across the sector are likely to remain subdued in the months ahead, the group said that new orders continued to decline, and at a faster pace than that reported in December.

And orders for all sub-sectors fell during the month, pointing to a broad-based loss of momentum across the sector.

“Weakness was most notable in the engineering construction sector where new orders dropped further into negative territory to be at their lowest level in eight months,” said the Ai Group.

“In contrast, new orders fell at a slower pace in the apartment sector, while rates of declines remained marginal in both housing and commercial construction.”

On new orders in the apartment sector, an area of particular attention given growing concerns over a supply glut in many inner-city areas in Australia’s eastern capitals, it said that after falling for five consecutive months, it “points to softer demand for new apartment developments, relative to recent solid levels in mid-2016”.

Despite the mixed performance, the group said that “on-going softness in new orders is likely to act as a headwind to stronger activity over coming months”.

Adding to evidence that outcome is already occurring, capacity utilisation across the sector slumped during the month, falling 5.4 percentage points to 68.5%, leaving it well below its average over the past year of 73.5%.

Outside of those subindices, employment continued to decline, albeit at a slightly slower pace than December, while supplier deliveries were largely unchanged.

Input prices continue to grow faster than selling prices, although at a slower pace, while employee wages, somewhat surprisingly given tepid conditions across the sector grew at a decent, and faster, pace.

Source: Ai Group

Peter Burn, head of policy at the Ai Group, said ongoing contraction across the sector “is a relatively gentle correction from very high levels of activity in engineering construction connected with the mining-investment boom and the easing back from the recent surge in residential building and particularly in apartment building”.

However, with momentum across the broader sector now clearly slowing, he said it “further underlines the importance of encouraging growth across a broader cross-section of the economy”.

The only question now is what parts of the economy are now in a position to take up the growth baton from construction?

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