The August PCI index shows that what had been a tapering of the construction boom at the June quarter has now turned into a sharp decline, driven primarily by the lockdowns in New South Wales and Victoria which pushed the PCI to a 12 month low of 38.4.
Australian PCI by month
The quarterly ABS data on construction work shows consistency with the PCI in trend in March. Whilst the PCI started to fall from March, the ABS data showed June quarter growth (0.8%) albeit much lower than the March quarter (2.4%).
Value of Construction Work Done – seasonally adjusted
Looking at the ABS data in more depth, we see that whilst overall growth of 0.8% was reported in the June quarter, it was made up of engineering construction growth of 1.8%, and a 0.1% decline in residential building work. We note this was on the back of a very strong 5.1% growth in the prior quarter and was likely a result of the shortages in construction materials being felt due to both COVID impacts and the higher levels of demand in recent quarters.
What is next for the Construction industry?
We expect construction activity to remain subdued whilst lockdowns continue in New South Wales, Victoria and the ACT, particularly as the ABS data does not yet capture the two-week construction shut down in Sydney in July. Given the difficulty in recommencing operations following the unprecedented (and unsignalled) shut down and the ongoing restrictions impacting productivity, our view is that the two week “pause” will have a circa six-to-eight-week impact on those operations that are able to recommence.
Whilst all metrics are currently trending downwards, McGrathNicol expects a sharp rebound once lockdowns end, particularly in the housing sector, with pent up demand for renovations and new housing kick starting the industry yet again.
Infrastructure spend is also expected to continue at record levels, as government focus shifts back to economic recovery and projects already in the planning stage become shovel ready.
Construction industry participants should be especially vigilant and detailed with their cash and working capital planning to ensure they are best placed to maximise their position for the expected rebound, which may result in significant working capital needs to fund the increase in activity.
Actions to be considered include more detailed cash forecasting by project to determine how best to cope with a period of potentially slower work progress and therefore lower progress payments but the same or similar cost base. Management of EOT claims will also be vital.