It’s been a huge week for Australian data. Better than expected news in Monday’s manufacturing PMI is proof the weak Aussie dollar is helping the economy and tourism is especially benefitting.
We also got a much stronger, and seemingly healthier, GDP report for the first quarter. But doubts remain about where the growth will come from if the current June quarter is to pick up where Q1 left off. Yesterday’s April retail sales and trade releases were a disappointing start.
But all of that pales in comparison to this morning’s release of the AiGroup Performance of Construction Index (PCI). Think of it as a monthly health check on Australia’s construction sector.
What’s strange about this release is that earlier this week the CBA said Australia’s construction boom will continue to run at record levels.
But this morning the AiGroup said the PCI for May remains in contraction territory with a print of 47.8. Sure, it’s up 0.8 on the month prior but it’s still below the 50 expansion/contraction level. It’s been that way for a while now. But what’s strange, in the context of Australia’s housing construction boom, is that Australia’s house building sector turned negative for the first time in three months (down 3.3 points to 48.3), while a steeper rate of decline was evident in apartment building (down 2.7 points to 47.0). Indeed Engineering (+2.9 to 48.3) and commercial construction (+1.1 to 49.2), which have been the big drags on construction, were the bright spots.
Is this index the canary in Australia’s economic transition coal mine? A transition that rests heavily on construction, the jobs that flow with it and the spending that flows from it.
Or is there something else going on? How can home and apartment buildings be going gangbusters but the industry report it as being in contraction?
HIA chief economist Harley Dale summed up the conundrum nicely: “Current residential construction is very strong, with detached house building above average levels and the medium/high density sector setting fresh records. The May PCI updates for the residential sector are disappointing.”
They are indeed. Construction is an important part of Australia’s economic transition. If the retail aspects of house and apartment building really are contracting then the economy is facing some serious headwinds.
Either way this data looks strange.