A key index which is widely considered to be a reliable barometer of conditions within the building and construction industry in Australia has dropped back, leaving some commentators to question the strength of the recovery albeit with the majority remaining convinced a recovery of sorts has taken hold.

In January, the Performance of Construction Index (Australian PCIᶱ) published jointly by Australian Industry Group (Ai Group) and Housing Industry Association (HIA) eased back 2.6 points from 50.8 to 48.2 – slightly below the 50.0 mark separating improving conditions to deteriorating conditions.

Driving the contraction was a renewed decline in new orders (down 6.6 points to 47.7) as well as a steeper fall in employment (45.1) and a continued reduction in deliveries from suppliers (49.0).

In terms of sectors, strong investor interest drove a continued expansion in house building (57.5) whilst engineering (54.3) also continued to expand. Weaker readings, however, were evident in apartments (45.4) and commercial building (47.0).

Ai Group Director Public Policy Peter Burn said the latest data showed some cause for concern about the strength of the sector’s recovery.

“January’s drop in the Australian PCI® casts a shadow over the signs of recovery in the sector evident in the last few months of 2013” Burn said. “Its performance in the next few months will be critical in determining whether there is a consolidation of the gains of late last year or a resumption of the weakness that has characterised the residential and commercial construction slump in the past couple of years.”

Meanwhile, HIA Senior Economist Shane Garrett welcomed what he said was further confirmation of a recovery in new home building but expressed concern about the weaker reading in the apartment sector and reiterated calls for further measures to reform planning and unlock land supply in order to address supply-side bottlenecks to new house construction.

performance of construction index

Performance of construction index – Click to enlarge

Key points:

  • The latest Australian Industry Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI®) was 2.6 points weaker at 48.2 in January (readings below 50 indicate a contraction in the industry with the distance from 50 indicative of the strength of the decline).
  • New orders (47.7) contracted for the first time in five months, reflecting falls in the uptake of new work in the apartment, commercial and engineering sectors.
  • Deliveries from suppliers (49.0) declined for a second consecutive month.
  • Whilst house building (57.5) and engineering (54.3) continued to expand, weaker readings were recorded in commercial building (47.0) and apartments (45.4).
  • Despite the recent recovery, pressure on profit margins remains as selling prices (46.4) contracted amid high levels of competition for work even as input costs (70.5) continued to rise.