Construction Shrinks for Fifth Month in Row

Construction activity across Australia has fallen for the fifth consecutive month since June, according to the AI Group and HIA’s index. 

The Australian Performance of Construction Index dropped by 3.2 points to 43.3 in October. 

It is a seasonally adjusted national composite index that uses diffusion indexes for activity, new business, deliveries and employment with varied weighting applied to each measure. 

Readings below 50 on the PCI indicate a contraction in activity with lower results pointing to a faster decline as the distance from 50 in either direction indicates the strength of the change.

The rate of decline has increased since September. 

October’s results also posted the first contraction of all four subsectors: commercial, engineering, housing and apartments since August 2021.

Ai Group chief policy advisor Peter Burn said that the increase in interest rates was having an effect.

“Economic uncertainty and several months of interest rate rises are clearly impacting the construction sector and particularly the residential subsectors,” Burn said.

“Lending data from the ABS show a continuing reduction in new loans for home buyers compared with the much higher levels seen over the period of exceptionally low interest rates.” 

Construction activity in October

_{^ Source: Australian Performance of Construction Index, October 2022, Ai Group, HIA} 

Both the commercial and engineering subsectors recorded falls compared with September while there was an increase in activity compared with September for both the housing and apartments but still an overall decline. 

Employment within the industry has also fallen by 12.7 points, reaching its lowest point since July 2020 at 42.2 points. 

Labour shortages particularly for skilled workers is still a concern.
The rising interest rates and uncertainty in the economy are affecting demand with the results seen in the numbers for construction sales and new orders.

HIA senior economist Nicholas Ward said the rate rises meant a shift in focus to completing existing work in the pipeline.

“RBA cash rate increases are working,” Ward said. 

“Rate hikes, combined with builders’ focus on completing the pipeline of existing work, have seen new sales materially weaken in recent months.”

Input prices are still growing albeit a bit slower than previously recorded and now sit at 83.7 points, the lowest since February 2021.

Selling prices have remained the same as they were in September at 77.1 points but are still growing though at a lower level than the peak in July 2022.

Capacity utilisation is at 82.8 per cent, down slightly but still higher than the usual 74 per cent average that has been the case since the start of 2021.

“It will be some time before the full effect of rate hikes is evident in terms of reduced capacity utilisation and reduced cost pressures, because the pipeline to work through is so large,” Ward said.

Burn said that the next few months would show similar levels of decline.

“With the Australian PCI new orders indicator showing a further decline of new orders and with the further rate rise announced this week and with more rate rises foreshadowed, further declines in construction activity appear likely over coming months,” Burn said.