Australia's construction downturn continues

Australia's construction industry contracted further in November, with the Australian Industry Group - Housing Industry Association Performance of Construction Index (Australian PCI) falling 4.4 points to 32.0, well below the key 50.0 points level separating expansion from contraction for a ninth consecutive month.

Commenting on the latest survey results, Australian Industry Group (Ai Group) associate director Economics and Research, Tony Pensabene, said, "Following on from the National Accounts data released on Wednesday, which showed that growth in investment in new dwellings (gross fixed capital formation) fell sharply in the September quarter 2008, this more up to date assessment shows that there has been a further deterioration in house and apartment construction as tight credit conditions and deteriorating economic sentiment continued to hit demand for building projects.

"Furthermore, activity in engineering and commercial construction also weakened in November, while new orders for the industry as a whole are now at their lowest level in the 38 months since the survey began. This indicates that the current weakness in activity is likely to continue during the months ahead," added Mr Pensabene.

Housing Industry Association (HIA) chief economist, Harley Dale, said HIA's outlook is for a continued decline in residential construction activity into early 2009 and this will be evident in the 2008/09 financial year, which will prove to be a much weaker period for home building activity than 2007/08.

"Sadly, the sustained deterioration in the Australian PCI that is still occurring late in 2008 reinforces our assessment that the short term prospects for the housing industry are poor. However, we remain of the view that substantial monetary and fiscal stimulus will deliver a stabilisation followed by recovery in the residential sector as we move through 2009," said Mr Dale.

Australian PCI key findings for November:

• The Australian PCI registered 32.0 in November a fall of 4.4 to remain below the key 50-point level separating expansion from contract for the ninth consecutive month. It was also the second steepest fall in industry conditions since the survey began in September 2005.
• The construction industry contracted at a more rapid pace than the previous month, as the global economic and financial crisis and heightened aversion to risk continued to take a heavy toll on activity.
• The decline reflected reductions in activity on a broad industry front, although the worst conditions were evident in the house building and apartment sectors where activity fell to new survey lows.
• Most firms linked the reduction in total construction activity to the on-going economic and financial crisis and poor market demand. There were also reports that competition to secure contracts had intensified, resulting in a higher level of unsuccessful tenders and diminishing new project work.
• For the industry as a whole, levels of activity, new orders and employment all fell substantially in November and at record rates (for this survey). As a consequence, contractors were forced to further scale back their deliveries from suppliers.
• While construction material (input) costs increased, the rate of growth moderated for a second consecutive month.

The Australian PCI is a seasonally adjusted national composite index based on the diffusion of indices for sales, orders/new business, deliveries and employment with varying weights across the residential, engineering, non-residential (commercial) and apartment sectors.

An Australian PCI reading above 50 points indicates 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. Australian PCI results are based on responses from approximately 120 companies.