Conditions in the Australian construction industry continued to deteriorate in July amid poor demand and subdued workloads, the latest report has found.
And as the decline in selling prices and employment levels continues to worsen, the impact of the sector’s woes is increasingly flowing through to shareholders and workers.
In July, the Performance of Construction Index (PCI) fell by 2.2 points from 34.8 to 32.6, according to the latest Performance of Construction Index report published by Australian Industry Group (AIG) and Housing Industry Association (HIA)
At this level, the PCI is not only well below the 50.0 level separating increasing construction activity from decreasing activity, it is at its lowest point since September last year (see chart).
This means that not only are conditions in the industry deteriorating, they are doing so at an extremely fast pace.
Measured by the PCI, construction activity has now declined for 26 months on end.
Furthermore, as new orders (33.9 – up 0.5 on the index) continue to plummet – albeit with the pace of that decline having moderated in recent months – the speed at which new work is coming in continues to decline.
Worse, as the indexes for selling prices and employment continue to fall through the roof, the impact of the downturn in activity upon profit margins and the sector’s workforce continues to intensify.
Registering 35.0 (down 3.9 points) on the index, selling prices are declining at their fastest pace in more than two years even as input prices (70.4) continue to rise.
In terms of the sector’s labour market, the level of employment (32.7 – down 6.3 points) in the sector declined last month at a faster pace than any other time since September last year.
Indeed, the only thing shown to be going up in last month’s report are wages (58.8) and input costs (70.3).
Australian Industry Group Director of Public Policy Peter Burn says ongoing weak activity in residential and non-residential building continue to weigh on the sector.
“Despite recent interest rate cuts, the construction industry remained in the doldrums in July with the ongoing slumps in commercial and housing construction the biggest drags on activity” he says.
Burn says that with new orders and employment levels continuing to fall, the new financial year has bought little cheer to the sector.
HIA Senior Economist Andrew Harvey says the latest figures show that interest rate cuts are yet to have any discernible impact.
Harvey says the sector is not being helped by a ‘competitive environment that sees new housing at a considerable disadvantage to existing housing because of excess taxation’.
Perhaps the only bright spot in the latest report is that the pace of contraction in apartment building (up 11.1 points to 32.9) has eased, an indication, according to the report, that ‘more projects are moving through to the commencement stage’.
Other than that, activity in stand-alone housing (28.0), commercial (26.1) and engineering (39.5) all continue to contract – albeit with the pace of such declines having generally stopped accelerating in recent months.
(Note: In contrast to ABS figures, which show strong levels of engineering activity in terms of dollar values due to the mining boom, the decline in the engineering sector of the PCI reflects the relatively small portion of civil construction firms which benefit from the resources sector.)
Charts: Australian Industry Group
Key Findings
Key findings of the July PCI report are as follows:
- The Australian Performance of Construction Index (Australian PCI®), was 32.6 in July – 2.2 points weaker than the previous month (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decrease).
- July’s reading is the lowest since last September. The index has now been contracting for more than two years.
- All four sub-sectors remained in the red in July: house building (28.0), commercial construction (26.1), apartment building (32.9), and engineering construction (39.5).
- Apartment building recorded a marked reduction in contraction in July, reflecting a boost in multi-unit approvals.
- The new orders sub-index was broadly unchanged – up slightly to 33.9.
- Employment (32.4) contracted further in July.
- Whilst input costs (70.4) continue to rise, selling prices (35.0) declined at their fastest rate in at least two years.
