While the Australian economy likely grew at a solid clip in the June quarter of this year, extending its run without experiencing a technical recession to 25 years, the early activity indicators suggest that the September quarter is unlikely to be anywhere near as strong.
Horrible, to be frank.
The latest Performance of Construction Index (PCI), released by the Ai Group earlier today, also slid in August, falling 5.0 points to 46.6 points.
Like the better known PMI reports released worldwide, the PCI measures activity levels across Australia’s construction sector from one month to the next. A reading above 50 signals that activity levels improved while a sub-50 figure, like that seen in August, indicates that activity levels deteriorated from a month earlier.
In other words, the higher the number, the better.
Though the ugly headline print is disappointing, continuing the theme seen in other activity reports released in recent days, one look at the breakdown of the report suggests the weakness was concentrated in one subsector and one subsector only: housing construction.
“A particularly steep fall in housing activity (a drop of 13.8 points to 41.1) dominated the sector in August and was only partly offset by growth in apartment building (up 8.8 points to 56.8), commercial construction (up 1.4 points to 53.2) and engineering construction (up 6.9 points to 55.5),” notes the Ai Group.
Essentially, while housing construction activity plunged, levels for apartment, commercial and engineering construction all expanded at a modest clip — something that certainly fits with recent data on building approvals and public infrastructure spending.
The group notes that “engineering construction expanded for the second time in three months” with the gain “attributed by some businesses to an upturn in infrastructure activity, particularly transport projects in NSW”.
The table below from the Ai Group breaks down the monthly performance by subsector, along with individual activity indicators. It must be noted that all these are based on three-month moving averages, designed to strip out volatility in the data. Not that it made much of a difference in August.
Looking ahead, the new orders subindex — a lead indicator on futures activity levels in the sector — fell by 6.2 points to 45.5, although this too was largely as a result of weakness in new home orders, note the Ai Group.
“New orders in house building contracted in August, with the sector’s new orders sub-index decreasing by 14.9 points to 39.3 points,” it said. “It points to a further softening in house building activity in coming months and follows a 0.5% m/m fall (-2.9% p.a.) in private sector house approvals in July.”
Outside of apartment orders which came in at 50.3, down 2.7 points on July, the measures on new orders for engineering and commercial construction also declined, falling to 47.0 points and 48.1 points respectively.
Despite the mixed nature of the August report, Harley Dale, chief economist at Australia’s Housing Industry Association, laments the lack of non-residential construction across the country right now, warning that it is not in a position to offset a likely slowdown in residential construction that looks set to peak in the current financial year.
“We’re at the peak of the residential construction cycle, but the Australian PCI suggests there is not enough non-residential activity coming along behind,” he said.
“New home construction has been the kingmaker of the Australian economy in recent years – it’s a shame policy makers have failed to respect its importance.
“When new home construction inevitably peaks by 2016/17, people will look to a plan for further growth. Right now there seems to be nothing, because housing is the convenient bedrock and nobody has the vision to look beyond the short term,” he added.
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