Australia just received some good news on where the economy is heading

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On a day when Australia’s GDP report is likely reveal a sharp slowdown in economic activity in the first three months of 2017, partially in response to a sharp decline in dwelling investment, we’ve just received some promising news on where the Australian economy is heading.

Activity levels across Australia’s construction sector soared in May, improving at the fastest pace in more than two years, according to the latest Ai Group’s Performance of Construction Index (PCI).

The PCI, produced in conjunction with Australia’s Housing Industry Association (HIA), jumped by 4.8 points to 56.7, indicating that activity levels improved at the fastest pace since late 2014 last month.

The PCI measures changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So activity levels improved rapidly last month, a performance in stark contrast to that seen late last year when activity levels were declining.

Indeed, activity levels have now improved in each of the past four months.

Source: Ai Group

Making the performance more impressive, activity levels improved rapidly in apartment, commercial and engineering construction sectors which were previously weak, helping to offset a sharp contraction in housing construction during the month.

“Across the four sub-sectors, apartment building activity drove growth in industry conditions in May,” said the Ai Group. “The sector’s activity sub-index expanded for a second consecutive month and at the steepest pace since November 2015.”

And there was even better news on the outlook for engineering construction where activity levels expanded at the fastest pace in nearly a decade, driven by increased levels of non-mining infrastructure work.

“The rise in engineering construction was again linked to the roll-out of various big-ticket transport infrastructure projects,” the Ai Group said.

Commercial construction activity also flourished, improving at the fastest pace in 32 months. The Ai Group said the improvement was driven by reports of increased success in securing new building contracts.

The one area of weakness came from housing construction — previously an area of strength — with activity levels declining for the first time in five months.

“(This is) a further sign that the housing sector is cooling,” the Ai Group said.

This table shows how each sector, and activity subindex, fared in May.

Source: Ai Group

Not only did activity levels improve rapidly in most sectors, the new orders measure — an indication on levels of activity in the future — also improved rapidly, hitting the highest level in over 11 years.

11 years!

“This firming in new orders points to a positive outlook for overall industry activity in coming months,” the Ai Group said.

“New orders returned to growth in the commercial building sector while the rate of increase lifted strongly in the apartment and engineering construction sectors. However, new orders for house builders increased only marginally in May after firmer growth over the previous three months.”

So all sectors recorded an increase in new orders last month — a good sign for construction activity in the second half of the year, and beyond.

Reflective of that new pipeline of work, and firming levels of activity with capacity utilisation across the sector rising 1.1 points to 78.8 points, firms also upped hiring of workers with the employment subindex jumping 5 points to 54.6.

Again, a promising sign on the outlook for employment growth.

Julie Toth, chief economist at the Ai Group, was understandably impressed with the May report.

“Building approvals trends plus the forward orders series in the Australian PCI suggest this boom in apartment construction activity still has some way to run,” she said.

“In the engineering and commercial construction sectors, a stronger flow of work from big transport infrastructure projects and from commercial projects relating to tourism, healthcare and manufacturing seems to be countering the down-swing in mining-related projects.

“These are extremely positive developments that should add to wider business productivity and capacity.”

Shane Garrett, senior economist at the HIA, agreed with that view.

“Today’s report provides further evidence that the strength of apartment building is holding up for considerably longer than most of us expected,” he said.

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