Construction growth on the rise, while services continue to fall

The services sector has dropped to a 14-month low according to data released by the Australian industry Group (AiG), while construction growth reached a nine-year high and manufacturing remained stable.

Each month AiG releases real-time performance indices for three industry sectors. These national indices are constructed from survey data collected from businesses Australia-wide, on a representative sample basis. The indices are seasonally adjusted ‘diffusion indexes’, based on a number of key activity indicators including sales, production, new orders, supplier deliveries and employment.

House building activity is still expanding and apartment development is robust (although increasing at a slower rate), while commercial construction has risen for the third consecutive month. Participating companies in the construction sector attributed a general improvement in activity to stronger levels of demand and an associated increase in new order intakes and tender opportunities. Buyer confidence remains firm, with activity continuing to benefit from solid investor activity. A lack of public sector tenders and a decline in mining-related engineering construction activity were cited as the key weights on the industry.

It’s just as well that confidence is high in the construction sector, as consumer sentiment is particularly subdued in the services sector. Participants in the performance of services index (PSI) reported continuing concerns over the weak state of the local economy, the ongoing decline in mining construction and manufacturing, as well as slow growth in household disposable income. Only two subsectors - a) accommodation, cafes and restaurants and b) personal and recreational services - recorded any expansion activity. While the pace of contraction in the transport and storage services subsector has slowed, it has continued to contract for 27 consecutive months, with at least some of the pressure being attributed to subdued activity in wholesale and retail trade, affecting demand and prices for local freight transport services.

Manufacturing was a bit of a mixed bag, with some subsectors reporting contraction (printing and recorded media, textiles and clothing) and others expanding (the large food, beverages and tobacco subsector and the small but diverse textiles, clothing and furniture sector). The flow on-effect between industries is clearly highlighted through an increase in demand for wood-based building products, thanks to increased housing activity, and for paper products such as packaging required for the shipment of food and beverage, which has resulted in an overall expansion in the wood and paper subsector.

Despite a depreciation in the Australian dollar between early September and the report’s October publication date, the then relatively high rate was still seen as supporting intense import competition. Business remains cautious and reluctant to invest, particularly as the end of Australian automotive assembly draws closer and mining expansion slows.

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