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Lacklustre end to 2014 for construction

09 January, 2015

The national construction industry contracted at a slightly steeper rate in December, with the Ai Group/HIA Australian Performance of Construction Index (Australian PCI) dropping 1.0 point to 44.4 points.

The decline in activity and new orders seen in November continued this month, with the activity sub-index dropping a further 2.9 points to 44.5 points.

While new orders recovered slightly (up 2.2 points to 46.1 points), the sub-index remained in contraction for a second month. This resulted in further cuts in employment (down 2.1 points to 39.9 points) and in deliveries from suppliers (down 1.7 points to 48.4 points).

Contraction of sub-sectors

All four construction sub-sectors in the Australian PCI contracted in December. Following five months of growth, the apartment building activity sub-index dropped sharply to its lowest level in 16 months (down 14.3 points to 43.7 points). House building activity contracted for the first time since August 2013 (down 5.5 points to 46.3 points), while the commercial sub-sector experienced a steeper rate of decline (down 4.4 points to 41.6 points). Engineering construction continued to exhibit weakness, contracting at about the same rate as the previous month (45.2 points).

Loss of momentum

"Recovery in the construction industry was looking very promising through the middle of 2014, particularly in the housing and apartment sectors," Ai Group Chief Economist, Julie Toth, said.  

"In the final months of 2014 however, this much-anticipated recovery seems to have lost its momentum.

"We saw a noticeable deterioration across most of the key activity indicators for house building and apartment construction in November and December.

"Commercial construction has failed to pick up pace, reflecting an ongoing lack of demand for new commercial and industrial facilities, while engineering construction is now experiencing the well-documented downswing in mining-related projects, as well as a decline in public sector projects.

"The lack of growth in new orders for construction in the final two months of 2014 is of particular concern to the outlook, especially in the commercial and engineering sub-sectors."

Optimism for 2015

Toth said: "In housing, new orders look to have stabilised after growing strongly for much of 2014. This stability bodes well for the pipeline of work that will commence in the all-important new housing sector in 2015."

HIA Economist, Diwa Hopkins, said: "The synchronised decline in each of the activity components of the Australian PCI in December 2014 is obviously a disappointing result. 

"Unfortunately, this weakness filtered through to the construction labour market, with the employment sub-index indicating cuts in the industry's employment levels. 

"Furthermore, the one bright spot of Australian PCI – its residential construction components – slipped into contractionary territory.  Strong growth in new home building had been buoying not only Australia's construction sector, but also the wider economy throughout 2014.

"Nevertheless, we still expect activity in this sub-sector to remain elevated in 2015, even if lower than the record level experienced in the year just passed."

Australian PCI - Key Findings for December:

  • The Ai Group/HIA Australian Performance of Construction Index (Australian PCI) contracted at a slightly steeper rate in December, falling 1.0 point to 44.4 points.
  • The construction activity (down 2.9 points to 44.5 points), new orders (up 2.1 points to 46.1 points) and deliveries from suppliers (down 1.7 points to 48.4 points) sub-indexes all contracted.
  • Activity in all four industry sub-sectors contracted in December: apartment building dropped sharply, falling 14.3 points to 43.7 points; house building contracted for the first time since August 2013 (down 5.5 points to 46.3 points); and commercial construction contracted for a second consecutive month (down 4.4 points to 41.6 points). Engineering construction remained weak (unchanged at 45.2 points).
  • After dropping steeply in November, the construction employment sub-index fell a further 2.1 points to 39.9 points. Growth in wages continued however, with the wages sub-index relatively steady at 58.0 points.
  • Pressures on profit margins remain strong: input costs remained elevated (down 4.6 points to 69.9 points); and selling prices dropped by 2.7 points to 42.5 points, reflecting fierce price competition as builders seek to secure work in a very competitive market.

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