Construction Sector Contractions Slow

The Australian construction sector continued to contract during November, albeit at a slower rate of decline compared to the previous month.

The Australian Industry Group-Housing Industry Association Australian Performance of Construction Index (Australian PCI) rose by 4.9 points to 48.2 in November, indicating contraction in activity across the construction sector for a sixth month.

Readings below 50 indicate contraction in activity, with lower results indicating a stronger rate of contraction.

According to the index, the decline in the new orders index eased compared to October, lifting by 2.1 points to 45.3 points in November (seasonally adjusted).

New orders increased for engineering but contracted for housing, apartments and commercial activity.

Interest rate increases and uncertainty about the economic outlook kept orders in contraction as constructors reported a slowdown in interest and customers delaying or cancelling projects.

As well, the input prices index jumped 8.3 points to 91.9, returning to the elevated results seen earlier this year, according to the index.

The selling prices index dropped lower than September and October indicating fewer builders were able to pass through higher input costs, constraining profit margins that month.

According to Ai Group chief policy advisor Dr Peter Burn, two factors had helped the slowdown of the decline: reduced absenteeism due to illness improved labour availability and supply-chain disruptions eased.

“However, the industry remains in mild contraction, and wage and input costs remain elevated and are still growing,” Burn said.

“The cumulative effect of interest rate rises and increased economic uncertainty poses concerns for the industry looking forward.”

Australian PCI November

^{^ Source: Construction PCI}

HIA economist Tom Devitt said the RBA had already had a material impact on home-buyer interest in the market.

“New home sales and home lending have dropped substantially,” he said.

“Labour shortages also look to have peaked, aided by the return of overseas workers and fewer worker hours being lost to illness. This should help ease price pressures.

“But the lags that characterise this cycle mean the full impact of the RBA’s hikes to date won’t be seen until the second half of 2023.

“Further hikes in 2023 would jeopardise the housing industry’s ‘soft landing’ in 2024 and beyond.

“This undermines the Australian government’s goal of a million new homes in the five years to the end of 2028.

“This would have serious implications for housing affordability across Australia.”