Australian construction sector declines for tenth consecutive month

Australia's construction industry saw a further decline in December with the Australian Industry Group - Housing Industry Association Performance of Construction Index (Australian PCI) falling 1.1 points to 30.9.

This is well below the critical 50 points level separating expansion from contraction and the tenth consecutive month activity in the construction sector has been in decline.

Commenting on the latest results, Australian Industry Group (Ai Group) associate director economics and research, Tony Pensabene, said, "As we begin the New Year, the results provide little doubt that the construction industry remains under substantial pressure as the economic and financial crisis continues to adversely affect market confidence and demand for building projects.

"Furthermore, we are continuing to see conditions deteriorate on a broad industry front. The engineering and commercial construction sectors are being hit hard by the lack of credit availability and a reluctance of clients to commit to new projects. There are as yet, no signs emerging from the Australian PCI of a boost to demand for house building, following recent interest rate cuts and changes to the First Home Owners Scheme.

"Highlighting the weakness in demand, new orders have now fallen for ten straight months, and with significant declines being recorded across the industry, the current weakness in activity is likely to persist into 2009. That said, there remains hope that we will see an early improvement in engineering construction on the back of Federal and State Government funding commitments," Mr Pensabene said.

Housing Industry Association assistant director, industry policy, Ben Phillips, added the lack of evidence of stabilisation or recovery in the house market at the end of 2008 was of concern.

"Weakness in the high rise market will unfortunately persist well into 2009 as a result of the lack of available finance. We have already seen this situation in late 2008 with a marked spike in the number of deferred projects.

"For the detached house market, however, lower interest rates and fiscal stimulus should show up in an emerging recovery, albeit one that is unlikely to be of a large magnitude. Evidence of such a recovery has yet to come to light, save for anecdotes of a stronger end to 2008 for new home lending," said Mr Phillips.

Australian PCI key findings for December:

• The Australian registered 30.9 in December, a fall of 1.1 on the previous month as company's continued to be severely affected by the economic and financial crisis and deteriorating market demand.
• The latest decline was underpinned by continued falls in activity across all major sectors of the industry. House building remained the worst performing sector (although its reduction was less marked than the previous month), while rates of decline picked up in both engineering and commercial construction.
• The further fall in construction activity was attributed to poor demand conditions and a lack of new project work. This was mainly linked to the adverse state of economic and financial conditions, and negative client sentiment. It was also noted that intense competition for new contracts had persisted, resulting in a high failure rate for tenders and diminishing order books.
• For the industry as a whole, levels of activity, new orders and employment both fell substantially in December and at the most marked rates for this survey. This resulted in further cutbacks in employment and deliveries from suppliers, although at lesser rates than in the previous month.

The Australian Industry Group - Housing Industry Association Performance of Construction Index (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.

A 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.