Australian construction activity downturn intensifies

Australia's construction industry registered "a marked decline" in September, led by "substantial" falls in commercial and apartment building activity, according to the latest report by the Australian Industry Group - Housing Industry Association (HIA) Performance of Construction Index (Australian PCI).

The index fell to just 31.8 in September, remaining well below the key 50-points level separating expansion from contraction, the seventh consecutive month it has been below 50 points.

Commenting on the results, Tony Pensabene, Australian Industry Group (Ai Group) associate director economics and research, said, "The results highlight the considerable pressures on the construction industry, with the on-going credit squeeze and deteriorating economic sentiment contributing to a marked fall in demand for building projects.

"This is particularly evident in the sizeable reductions in work on apartment and commercial developments during September and the persistent weakness in house building activity.

"Adding to the pressures on the industry is the continued rise in input costs which is squeezing profit margins.

"Of concern, new orders for the industry as a whole are now at their lowest level in three years, signalling that the current weakness in activity is likely to continue during the months ahead. The results of the Australian PCI for September reinforce the need for the RBA (Reserve Bank of Australia) to cut the official cash rate today," said Mr Pensabene.

HIA Chief Economist, Harley Dale, said the breadth of weakness in the Australian PCI was a big concern. "The deterioration in construction conditions is intensifying in 2008/09, with the commercial sector joining a housing industry that has now been soft for a very long time.

"In terms of residential construction, the renewed weakness in activity looks set to extend well into 2009, highlighting the urgency for appropriate action from the RBA today to ensure mortgage relief is immediately forthcoming," Mr Dale said.

Australian PCI key findings for September:

• The Australian PCI registered 31.8 in September, a drop of 11.3 on the previous month.
• The continued fall in construction activity reflected widespread reports of weak market demand and a shortage of new project work.
• The overall negative viewpoint of firms was also linked to economic uncertainty and the credit squeeze, which were seen as the principal causes of on-going delays in building commencements.
• For the industry as a whole, both activity and new orders fell markedly in September to hit new survey lows. This resulted in firms reducing their workforces at the highest rate over the three-year history of the survey.
• Construction material (input) costs increased leading to further pressure on profit margins.

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.