Construction market shows continued fragility

New orders in the commercial sector in particular has dropped off

Construction across Australia slipped in March after an improvement in February, according to the Australian Industry Group/Housing Industry Association Australian Performance of Construction Index.

The Index revealed construction was 6.6 points weaker at 39.0, with readings below 50 indicating a contraction in the industry.

All the major sub-sectors were in negative territory in March, with engineering construction suffering the biggest blow, falling 14.8 points to 38.4.

Commercial construction had the lowest reading of 29.2, but new orders, employment and deliveries from suppliers were all weaker in March.

This year has been a turbulent time for some construction manufacturers and suppliers.

In March this year CSR announced it was cutting 150 jobs as part of a restructure of its glass operations, Viridian. The move was a reflection of the current construction market, CSR said, which has seen a “sustained structural shift … in the market for architectural glass products”.

Boral also announced in January that it was cutting 700 jobs from its Australian division as part of a company-wide restructure.

Julie Toth, Australian Industry Group chief economist, said the results for March are an indication that conditions are fragile across the entire construction industry.

“Driving the industry’s poorer performance was a return to contraction in house building and engineering construction, combined with sharper falls in commercial and apartment building activity,” she said in a statement.

“Of concern, the current stretch of decline in new orders for the industry has now extended to 34 months as businesses continue to be hampered by a shortage of new work, project delays and weak investor sentiment.

“The drop off in new orders was particularly sharp in the commercial construction sector, reflecting a scaling back in public investment and on-going weakness in approvals.”

Harley Dale, Housing Industry Association chief economist, said an improvement in the Index for March would have helped to allay concerns about the sustainability of a construction recovery in the residential sector.

“Alas, there was no such improvement, but rather a renewed deterioration, [with] the result for detached houses being of particular concern. This update highlights that prospects for a sustainable recovery are still patchy and fragile,” he said.

“Without concerted policy focus on reform and investment this situation is likely to remain the case. Several years ago many were of the mistaken belief that a sustainable recovery post the GFC-related stimulus was achievable. The Australian economy can’t afford policy makers to be found wanting twice in quick succession.”

Results from the Index reveal:

• across the major sub-sectors: house building was 4.5 points lower at 47.0; apartment building activity dropped by 8.0 points to 34.2; and commercial construction was broadly unchanged at a weak 29.3
• new orders fell 5.7 points to 36.0
• employment was weaker at 39.2. The Index said reports where employment fell indicate this was in line with reduced levels of incoming work
• many businesses linked the on-going declines in activity to subdued levels of incoming work, tight credit conditions and project delays

In the commercial construction sector, new orders contracted significantly, with the sub-index declining by 10.2 points to 29.6. This was driven by a scaling back in public sector construction activity and overall weakness in approvals.

The Australian Industry Group Performance of Construction Index is a seasonally adjusted national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment.