Australian construction activity contracts again

Australia's construction industry contracted for a fifth consecutive month in July according to the latest Australian Industry Group - Housing Industry Association (HIA) Performance of Construction Index (Australian PCI).

While there was an increase in engineering construction activity and a modest improvement in commercial construction the Australian PCI registered 41.6, well below the critical 50.0 points level separating expansion from contraction.

Commenting on the results, Australian Industry Group (Ai Group) associate director economics and research, Tony Pensabene, said, "The Australian PCI while still contracting, gained some support from the strength of engineering construction and the inroads being made into the massive pipeline of engineering construction projects. This was evident in the engineering construction sub-index, which registered 51.9 in July, up by a solid 15.2 points.

"While housing and apartment building remain very weak the decline in commercial construction is showing incipient signs of improvement," added Mr Pensabene.

HIA chief economist, Harley Dale, said, "Even allowing for moderation in the rate of decline in the Australian PCI continued weakness in the second half of 2008 is very concerning.

"New home building starts will fall in 2008, marking an unprecedented fifth consecutive year of weakness. An aggravation of the chronic shortage of housing stock will place further pressure on already exceedingly tight rental markets," Mr Dale said.

Australian PCI key findings for July:

• The Australian PCI registered 41.6 in July, as the national construction industry contracted for the fifth consecutive month.
• The subdued performance of the industry reflected on-going weakness in the house, apartment and commercial construction sectors.
• Firms experiencing declines in activities linked this to higher interest rates, tighter credit conditions, heightened risk aversion and low consumer and investor confidence.
• On an aggregate industry basis, declines in activity and new orders continued in July, albeit at a slower rate. This largely reflected improved conditions in the engineering construction sector. Nevertheless, with most sectors under pressure from reduced workloads, employment fell for a fourth straight month.
• The rate of increase in input costs was more pronounced in July, reflecting higher prices for a range of raw materials, particularly steel and fuel.