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'Subdued' start to the year for construction industry

06 February, 2015

A key industry index has shown the national construction industry remained in contraction in January.

Ai Group/HIA Australian Performance of Construction Index (Australian PCI) rose 1.5 points to 45.9 – index readings below 50 points indicate a contraction in activity, with the distance from 50 indicating the rate of the contraction.

January is the third consecutive month the index has been below the critical 50-point level.

Key figures

Reflecting the recent softening in overall industry conditions, the activity (44.1 points), new orders (45.6 points) and deliveries from suppliers (47.6 points) sub-indexes all remained largely unchanged from December. The slightly milder decline in the Australian PCI was mainly due to a less pronounced reduction in construction industry employment this month (up 7.6 points to 47.5).

All four construction sub-sectors contracted, with steeper rates of decline evident in both house (down 5.4 points to 40.9) and apartment building (down 1.4 points to 42.3) activity. Engineering construction continued to exhibit weakness, remaining largely unchanged at 44.7 points to record a seventh consecutive month in contraction. Commercial construction also declined, but conditions moved closer to stabilisation (up 7.4 points to 49.0).

Hopes pinned on interest rate cuts

"The easing of activity in the residential construction sub-sectors that was evident in the closing months of 2014 continued in January with house building slipping sharply and apartment building activity easing again," Ai Group Director - Public Policy, Peter Burn, said.

"This, combined with the well-entrenched contraction in engineering construction and a commercial construction sector that remained in negative territory, saw overall construction activity fall for the third consecutive month.

"With new orders in three of the sub-sectors also contracting further in January and new orders in commercial construction treading water, the immediate outlook is not encouraging.

"This week's cut in interest rates should boost activity in the months ahead, even though the long-awaited pick-up in business and household confidence is yet to materialise."

Keeping an eye on commercial sector

HIA Chief Economist, Harley Dale, said: "The January Australian PCI result is unequivocally disappointing, but let's see what February brings.

"Results for the new house building and apartment indices over the last six months are, in aggregate, consistent with healthy levels of residential construction in the short term.

"Evidence of further growth potential is what we need and will come from a return to expansion in forthcoming monthly Australian PCI results.

"Let's also keep an eye on the commercial sector. Should a February rate cut and a slow turnaround in business credit growth gather pace, the PCI will quickly pick up an improving environment."

Australian PCI - Key Findings for January:

  • The Ai Group/HIA Australian Performance of Construction Index (Australian PCI) contracted for a third consecutive month, if at a slightly milder rate of decline, increasing 1.5 points to 45.9.
  • Indexes for construction activity (44.1), new orders (45.6) and deliveries from suppliers (47.6) all remained largely unchanged from December 2014.
  • All construction sub-sectors contracted in January: house building declined for a second month, falling a further 5.4 points to 40.9; apartment building declined at a slightly steeper rate (down 1.4 points to 42.3); and engineering construction remained weak (down 0.5 points to 44.7). Commercial construction remained in contraction, but moved closer to stabilisation in recording its highest reading in three months (up 7.4 points to 49.0).
  • The construction employment sub-index eased its rate of decline after dropping to its lowest level in 18 months in December 2014, recovering 7.6 points to 47.5.
  • Pressures on profit margins remain strong: growth in the wages sub-index continued, if at a slightly slower rate (down 3.4 points to 54.6); input costs remain elevated (up 2.7 points to 72.6); and selling prices contracted at a slightly slower rate (up 3.5 points to 46.0).