Australia's construction sector roared back to life in June

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Almost out of nowhere, Australia’s construction sector is back, expanding strongly in June, according to the latest Performance of Construction Index (PCI) released by the Ai Group earlier today.

The PCI jumped to 53.2, up 6.5 points from the reading seen in May. It was the highest level seen in ten months.

Like the better known purchasing managers’ indices (PMIs), the PCI measures changes in activity levels across Australia’s construction sector from one month to the next. A reading above 50 signals that levels are expanding while a figure below 50 indicates that they are contracting. So, in other words, the higher the better.

Adding to the bullish headline figure, the internals of the report were impressive, perhaps even more so that the actual PCI, with all construction subsectors — houses, apartments, commercial and engineering — all reporting that activity levels improved during the month.

That’s rare. Very rare. In all my years covering this release I struggle to remember when such an outcome has occurred.

The table below, supplied by the Ai Group, reveals the bullish internals of the June report. All construction subsectors expanded, and all saw an improvement on levels seen in May.

Obviously the standout performance came from apartment construction which went from a massive contraction to a strong expansion in the space of just one month.

That fits with the strong building approvals number released in early 2016, and also indicates that much like that survey, apartment construction is quickly becoming a dominant and influence force on overall construction activity in Australia.

Outside of high-density housing, the figures were all strong, particularly those readings for commercial and engineering construction that have lagged the residential sector in recent years.

Housing construction also recorded its strongest expansion in the past 30 months.

And the recovery in June may be the start of an even stronger expansion to come, at least based on the new orders subindex which jumped 9.2 points to 52.1.

As a lead indicator on future levels of activity, this is a good sign.

There was also good news on the hiring front with the employment subindex rising 4.9 points to 53.9, indicating that hiring levels increased.

Although this survey is incredibly volatile, with trying to extrapolate one month’s performance fraught with danger, the June result is promising nonetheless.

That point was touched upon by Peter Burn, head of policy at the Ai Group, following the release of the June report.

“The construction sector hit a sweet spot in June with the bounce in the Australian PCI driven by growth across all of the sub-sectors and with solid gains in activity, employment and new orders,” said Burn.

“The residential sub-sectors of house and apartment building were the standout performers both in current activity and in new orders, suggesting they are on track to continue their expansionary run over the near term.

“While making positive contributions to current activity, the commercial and engineering construction sub-sectors both recorded a drop in new orders in June, providing less cause for optimism about the first quarter of the new financial year.”

Adding to caution over the huge boost seen in June, recent building approvals data released by the ABS fell heavily in May, led by high-density housing approvals.

We’ll receive further clarification on whether this improvement will be sustained with both releases arrive again in early August.

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