Construction index records sharpest drop in six years amid weaker demand

The Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (PCI) fell by 3.9 points to 39.1 in July, recording the construction industry's steepest overall rate of contraction in six years.

Readings below 50 indicate contraction in activity, with the distance from 50 indicating the strength of the decrease.

Ai Group Head of Policy, Peter Burn, said the decline in Australia's construction industry deepened in July as the Australian PCI fell to 39.1 points.

Steep declines in residential building activity together with a continued drop in commercial construction saw the construction sector’s performance in July record its sharpest monthly contraction since 2013.

Engineering construction activity maintained its stable pattern of activity of recent months, with reports of some project delays and a decline in new tender opportunities keeping activity weaker than 2018 levels.

"Looking ahead, conditions look more fragile than they have for some time with new orders dropping further into negative territory driven by particular weakness in the pipelines of new work in the housing and apartment sectors," Dr Burn said.

HIA Economist, Tom Devitt, said: "The Australian PCI showed the contraction in overall construction activity accelerated in July, although the news was slightly more positive for the residential components. While residential building activity continued to contract in July there are signs that the pace of decline is moderating.

"The positive impact of two cuts to the cash rate and cuts to personal income tax rates will take time to have an impact on residential building but it provides a sound basis to expect that the decline in activity will slow over the months ahead."

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Source: Ai Group & HIA Economist 

Australian PCI – Key Findings for July

• July marked an eleventh consecutive month of contraction in the Australian PCI®, with the rate of contraction at its steepest in six years (down 3.9 points to 39.1).

• The fall in the Australian PCI® was associated with a continued decline in new orders (down 5.5 points to 36.0 – also a six-year low) and a further reduction in deliveries from suppliers (down 1.5 points to 40.0).

• Employment also recorded a sharper rate of contraction (down 7.7 points to 35.9) indicating a general reluctance by businesses to increase their workforce capacity amid ongoing soft demand at an aggregate level.

• Three of the four construction sectors in the Australian PCI®continued to contract in July (in trend terms), with only engineering construction being broadly stable (down 0.8 points to 49.4). Apartment building was the weakest performing sector, declining for 16th straight month (down 0.2 points to 36.4), while house building also weighed heavily on overall industry conditions in its 12th consecutive month of contraction (up 0.6 points to 38.3).

• Cost pressures remained relatively high for building projects in July, despite the input prices index dropping 4.2 points to 63.2. Growth in wages also continued, albeit at a more moderate rate (down 3.1 points to 57.8), as difficulties in sourcing skilled labour persist.

• The selling prices index continued to contract in July, if at a slower rate (up 5.0 points to 36.6). This negative reading indicates that rising input prices and other costs are not, on average, being passed on to customers, as profit margins continue to be squeezed for businesses in the construction industry.

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Source: Ai Group & HIA Economist