The overall Australian economy may be growing strongly, but activity continues to decline in the nation’s building and construction sector, the latest data shows.
And as margins continue to contract and sector employment continues to decline, the impact of the weak conditions continues to be felt in terms of company profits and also by the nation’s construction workforce.
In the month of May, the Australian Performance of Construction Index (PCI) contracted by a further 0.2 points to come in at 34.7 – well below the 50.0 level which separates increasing construction activity from decreasing activity.
According to the PCI, published by Australian Industry Group in conjunction with Housing Industry Association, construction activity has now declined for twenty-four straight months.
New orders, too (33.7 on the index), continue to decline, reflecting the slow pace at which new work is coming into the system.
Furthermore, the impact of building weakness is flowing through to the nation’s construction workforce, which has been affected by the collapse of St Hilliers Construction Ltd and the troubles of Reed Constructions. With the sub-index for employment coming in at 38.4, the industry’s headcount showed a steep decline during the month.
Profit margins, too, remain under pressure amid rising input prices (68.8) and falling selling prices (36.0).
Australian Industry Group Chief Economist Julie Toth says that outside of resource construction, the sector remains deeply entrenched in negative territory.
“While the two consecutive cash rate cuts from the RBA in May and June are very welcome and will help to improve sentiment among home builders and investors, it will take some time for this benefit to flow through to actual construction activity levels” Toth says.
“In the meantime, the forward indicators such as building and credit application approvals all point to a further period of extended weakness in construction activity levels from here”.
Housing Industry Association Senior Economist Andrew Harvey agrees, saying that whilst interest rates are now moving ‘in the right direction’, fiscal stimulus will more than likely be required in order to get new home building, not to mention much of the non-resource economy, out of its current weak position.
In terms of sectors, commercial construction registered its sharpest fall in activity in more than three years as well as a weakening in new orders. Housing and apartment building, as well, continued to contract substantially. Engineering construction activity, buoyed to some extent by the strength of the mining industry, also declined during the month but did not do so as sharply as other sectors.
(Note: in contrast to figures from the Australian Bureau of Statistics, which has repeatedly shown the overall dollar value of engineering construction activity expanding in recent times because of the huge dollar values going into large mining projects, PCI data is based on surveys from construction firms. The engineering construction figure in the PCI, therefore, is not affected by mining to anywhere near the degree of ABS data because of the relatively small portion of overall construction firms which service the resource sector, notwithstanding the huge dollar values of investment flowing in to that sector.)