The national construction industry contracted further in June with solid falls in new orders and activity across the sector. The Australian Industry Group Australian Performance of Construction Index (Australian PCI®) in conjunction with the Housing Industry Association, fell 3.8 points to 35.8 (a reading below 50 indicates a contraction in activity).

While weakness was evident across the construction sector, the continuing decline of the house building sub-sector, which fell 5.7 points to 34.1, weighed particularly heavily on the performance of the sector overall. Subdued levels of incoming work fuelled in part by ongoing expectations of further interest rate rises, hampered growth across the construction sector during June.

Australian PCI® Key Findings for June:

  • The Australian Industry Group Australian Performance of Construction Index (Australian PCI®) in conjunction with the Housing Industry Association contracted further in June, falling 3.8 points to 35.8 (a reading below 50 indicates a contraction in activity).
  • June's Australian PCI® result reflects weakening demand across the sector. It also marks the 13th consecutive month of contraction for the construction sector.
  • New orders fell solidly in June to 32.2.
  • All the major sub-sectors were deep in the red in June: house building 34.1, apartments 33.2, commercial construction 33.5 and engineering construction registering 39.2.
  • Businesses reported an ongoing shortage of new tender opportunities, difficulties in funding construction projects together with uncertainty over future interest rate rises as affecting growth in the month.
  • Deliveries from suppliers also fell significantly in June in response to contracting demand.
  • Employment was also down across the construction industry.

Australian Industry Group Director Public Policy, Peter Burn, said: "The residential construction sub-sectors are continuing to suffer from widespread post-GFC consumer caution and ongoing fears of further interest rate rises. The commercial construction sub-sector marked a full year of contraction in June with private sector demand failing to offset the fall in public sector projects related to the unwinding of stimulus measures. The difficult conditions experienced during 2010-11 look set to continue into the opening months of the new financial year with the forward-looking new orders sub-indices recording declines in each sub-sector and for the sector as a whole," Dr Burn said.

Housing Industry Association Chief Economist, Harley Dale, said: "The accelerated decline in the detached house component of the Australian PCI® in June is alarming, given that this sector accounts for over 60 per cent of all new residential construction and interest rates to June had been on hold for seven consecutive months. Clearly the heightened cautiousness of Australian households in the post-GFC world has been aggravated by uncertainty and confusion over the timing of future interest rate settings. Place on top of that the intractable supply side obstacles to new home building for which the policy reform appetite seems to have disappeared, and you have a recipe for residential construction sinking to a concerning depth. The continuing decline in new orders for house building and apartments provides support for HIA's long held view that new home starts will decline in 2011/12 from an already softer year in 2010/11.

"The decline in new orders and overall activity across all major construction sectors evident for June provides compelling evidence for interest rates being kept on hold for the foreseeable future. The Reserve Bank may be inching towards that view, but a definitive and consistent 'rates on hold message' for the second half of 2011 at least would provide some relief," Mr Dale said.