Australian PCI®: Construction falls at steepest rate in six years

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Ai Group Head of Policy, Peter Burn, said: "The decline in Australia's construction industry deepened in May as the Australian PCI® dropped to 40.4 points. Falling building approvals are continuing to weigh on residential activity. House building conditions were particularly subdued in May on the back of the sector's sharpest fall in new orders in 6½ years. Commercial construction also continued to detract from overall industry performance, recording a 10th month of contraction. Disappointingly, the recent soft patch in engineering construction extended into May, although there were encouraging signs of some improvement in tender opportunities and the uptake of new work as more planned infrastructure projects moved through to construction. Nevertheless, with construction orders on a broad industry basis dropping at their steepest rate in just over four years, the overall construction downturn looks likely to continue over coming months. The industry and businesses in its supply chains will be hoping that lower official interest rates will flow through to borrowers and help turn around the recent negative trends," Dr Burn said.

HIA Economist, Tom Devitt, said: "The Australian PCI® for May showed that activity in the residential building sector continued to contract. Uncertainty in the lead up to the Federal election weighed heavily on the sector during the month. The new orders indexes for both detached houses and apartments were similarly weak in May. Housing market sentiment improved in the weeks following the federal election but it is still too soon for any improvement to translate through to activity on the ground. With major banks set to pass on most of the RBA's rate cut to borrowers, it will be interesting to note whether any post-election glee translates to a lift in new orders in June," Mr Devitt said.

Australian PCI® – Key Findings for May:

• The activity index in the Australian PCI® contracted more sharply in May (down 1.9 points to 39.7), while new orders also fell for a ninth consecutive month (down 5.0 points to 39.4 – its steepest rate in more than four years). This was associated with a continued decline in deliveries from suppliers (down 1.4 points to 45.0) and a further drop in employment (up 0.3 points to 39.5).
• Three of the four construction sectors in the Australian PCI® continued to contract in May (see table below), with only engineering construction achieving stability (up 0.4 points to 50.3). House building was the weakest performing sector, declining for a 10th straight month (down 0.4 points to 34.4), while apartment building also remained firmly in negative territory (up 2.0 points to 37.7).
• Cost pressures continued for building projects in May, with the input prices index jumping 7.7 points to 69.4. Growth in wages also continued, and at a faster pace (up 5.2 points to 60.9), as difficulties sourcing skilled labour persist.
• The selling prices index continued to contract in May, albeit at an easing rate of decline compared to April's six-year low (up 4.4 points to 36.2). The sizable gap between the input and selling prices indices demonstrates that profit margins are being squeezed for many businesses in the construction industry.

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Results above 50 points indicate expansion. All indexes for sectors in the Australia PCI® are reported in trend terms (Henderson 13-month filter).

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.