The latest Australian Performance of Construction Index (PCI) released by the Australian Industry Group (Ai Group) and the Housing Industry Association (HIA) showed the construction industry remained in a state of contraction in January.
After Quarry reported on the construction industry’s expansion for the third consecutive month in October, construction began to slow. The index fell 1.4 points to 50.7 in November before returning to negative territory in December with a 3.9-point drop to 46.8. In January, the index slipped a further 0.5 points to 46.3.
Index readings below 50 points indicate a contraction in activity, with the distance from 50 indicative of the strength of the contraction.
A steep 7.9-point drop to 46.4 for apartment building was said to be a major driver of the construction industry’s decline, with the decrease marking the sub-sector’s return to contraction after six months of expansion.
House building, on the other hand, recorded its second month in expansion, albeit at a marginally slower rate with the sub-sector’s index falling 0.3 points to 52.3.
Engineering construction improved slightly by 0.3 points but remained in contraction at 41.5.
Commercial construction recorded the weakest January result of all the sub-sectors, decreasing 3.5 points to 36.5. This was said to be the sub-sector’s sharpest rate of contraction since July 2013.
Residential building
Ai Group head of policy Peter Burn said the construction sector had become increasingly dependent on the strength of residential building in recent months, particularly apartment building.
“The drop in apartment activity, together with the decline in new orders across all four construction sub-sectors, suggests that construction may not play the leading role in rebalancing the broader economy that it played in 2015,” he commented. “This emphasises once again the importance of developing new sources of growth across the economy.”
Burn said Australian Bureau of Statistics data showed approvals of ‘other dwellings’ had fallen in 2015, indicating a slowdown in the apartment construction pipeline. He added that Australian PCI respondents had reported fewer inquiries and “increased caution by would-be apartment purchasers” in January.
“Nevertheless, [dwelling] approvals are still elevated and well above their 10-year average, indicating ongoing resilient activity,” he stated. “A range of other factors, including low mortgage interest rates, strong population growth and urban transport infrastructure developments will also continue to support the residential sector.”
Engineering and commercial construction
In terms of non-residential construction, Burn said engineering construction was expected to decline further from its recent peaks as mining construction and related infrastructure investment continued to be scaled back. He said it was also likely that “subdued conditions” would continue in commercial construction.
“Constrained public sector investment and weak white collar employment growth (two of the main drivers of office construction), poor growth in local retail spending (the main driver of growth in retail construction) and poor investor sentiment continue to weigh heavily on the commercial construction industry’s pipeline of work,” he stated.
HIA economist Diwa Hopkins said the index’s results suggested new home construction would pull back from the record levels experienced in 2015.
“The Australian PCI results also highlight the challenge for policy makers ahead,” she added. “That is, in early 2016, conditions in commercial and engineering construction look set to remain weak in an environment of declining residential construction activity. We need to see evidence of a recovery in non-residential construction but as yet, the Australian PCI suggests that the weakness of 2015 will persist into early 2016.”
The full Australian PCI report for January 2016 is available at www.aigroup.com.au
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