Construction sectors: Apartment building (24.9 points trend) was the weakest performing sector, declining for a tenth consecutive month and at the sharpest rate since July 2012. House building (34.4 points trend) also remained in negative territory with its rate of contraction the most marked in close to six and a half years. Across the major project areas, commercial construction (44.9 points trend) recorded a sixth month of contraction amid a continued decline in overall demand for commercial projects. Engineering construction (43.3 points trend) was also weaker at the start of 2019, falling for a second month and recording its lowest activity reading in three years.
Construction prices and wages: Input price inflation in the Australian remained elevated in January. The input prices index increased by 2.6 points to 74.6 points, indicating that cost pressures in the construction of building projects lifted during the month. The selling prices sub-index in the Australian PCI® increased by 3.6 points to 44.2 points in January, signaling a slightly slower rate of contraction in output prices. However, this negative reading continues to indicate that rising input prices and other costs are not, on average, being passed on to customers, reflecting the strong competition among builders in securing work. The wide gap between these price series in the Australian PCI® demonstrates that profit margins remain tight for many businesses in the construction industry.
Construction activity: Across the overall construction industry, both activity (39.4 points) and new orders (44.1) continued to contract in January, although at slower rates relative to the previous month. This was associated with a steeper fall in deliveries of inputs from suppliers (46.5 points) while employment also recorded a sharper rate of contraction (44.4 points) indicating a general reluctance by businesses to increase their workforce capacity amid ongoing soft demand at an aggregate level.
Construction highlights: Across the residential construction sectors, the influence of the downtrend in approvals from historic highs is continuing to have a negative impact on overall industry conditions. Commercial construction is also detracting from industry-wide performance. While businesses in the engineering construction sector have experienced a soft patch in the uptake of new work in recent months, the pipeline of public infrastructure works (including transport, wind and solar projects) remains solid and is likely to underpin more robust conditions for this sector in coming months.
Construction concerns: Respondents are continuing to indicate significant cost pressures in the construction of building and infrastructure projects due to elevated energy prices and supplier price rises, some of which are related to higher commodity prices. There is also widespread reporting of difficulties in recruiting skilled labour, particularly in occupations central to infrastructure activity. Other concerns included the sourcing building materials in the volumes required for major projects and accessing funding for investment and business expansion purposes.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
