Australian PCI: Construction boom interrupted by COVID lockdowns in July

Sudden disruptions to activity on site and supplier deliveries were reported by builders across all segments of construction in Victoria and NSW, which were both in COVID-19 lockdowns during July, while other states remained mildly expansionary.

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Ai Group Head of Policy, Peter Burn, said: "With Australia's two largest states affected by COVID-19 outbreaks and associated restrictions, the construction industry slipped into contraction in July after a robust nine-month expansion. The negative national result masked continued growth outside of NSW and Victoria and further expansions in both house building and commercial construction. Engineering construction was slightly lower while apartment building fell further into contraction. Builders and constructors reported difficulties obtaining inputs and skilled labour. Some of this is due to COVID-19 restrictions and some attributable to the strength of the expansion over the previous nine months. While there was some easing in the pace of price pressures, employers reported strong wages growth in July. New orders were broadly flat across the construction industry with the further slump in apartment orders balancing continued, though slower growth in the rest of the industry. The outlook over the next couple of months will depend heavily on the paths of the COVID-19 outbreaks and the extent of restrictions," Dr Burn said.

HIA Chief Economist, Tim Reardon, said: "Restrictions on builders working onsite have caused building activity to contract sharply in July. The Australian PCI® was dragged into negative territory for the first time in nine months following restrictions imposed to onsite building in NSW. The volume of building activity had been increasing since September 2020 but without the ability to work onsite the reported levels of building activity fell 14.4 per cent. Lockdowns in other cities have also impaired activity and new orders. Despite these lockdowns, there remains a record volume of new detached home building and renovation work to be undertaken, when restrictions ease. For builders in other regions, their main challenge remains keeping up with the large volume of work. Capacity constraints will remain a major challenge for at least the rest of this year. The exception to this is apartment construction, which continues to feel the adverse impact of constraints on migration," Mr Reardon said.

Australian PCI® – Key Findings for July:

• The activity indexes for all four sectors in the Australian PCI® dropped in July with big falls in NSW and Victoria due to lockdown disruptions, offset by ongoing expansion in other states. House building (down 3.1 points to 54.1) and commercial construction activity (down 0.1 point to 52.9) slowed in July but remained mildly expansionary nationwide (trend). Engineering activity was approximately stable (down 3.9 points to 49.2) and apartment building activity contracted at a faster pace (down 5.3 points to 35.0).
• The Australian PCI® index for new orders fell in July to sit just below the 50-point level separating expansion from contraction (down 6.6 points to 49.5). Across the sectors, new orders growth for housing slowed but remained largely positive, while orders for apartments contracted further. New orders for commercial projects dropped, particularly in NSW and Victoria, while confirmation for new engineering projects continued at around the same pace as in recent months, with only a slight deceleration.
• The indexes for input prices (down 1.1 points to 97.2) and selling prices (down 4.0 points to 81.2) eased off slightly in July from record highs in June. Builders nationwide continue to report very high prices from suppliers and importers, with more builders saying they need to pass on these cost increases to their customers.
• The employment index bounced up again in July (up 2.5 points to 60.8) and remains extremely elevated despite widespread lockdowns and disruptions. Construction capacity utilisation was steady at its record high of 85.4%. The wages index jumped 6.7 points to 77.1 as the new financial year brought a rise in the minimum wage and award rates, on top of wage pressures arising from skill shortages.

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Results above 50 points indicate expansion.

Background: The Ai Group/HIA Australian PCI® is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights. An Australian PCI® reading above 50 points indicates that construction activity is generally expanding; below 50, that it is declining. The distance from 50 is indicative of the strength of the expansion or decline.

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