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Construction downturn continues

Australia’s construction industry continues to face tough times, despite record low interest rates and a pickup in capital city house prices.

The Australian Industry Group/ Housing Industry Association Australian Performance of Construction Index (PCI) fell 0.4 points to 43.7 in August, with a reading of 50 separating contraction from expansion. The PCI has now remained below the critical 50 point level for 39 consecutive months, but the news doesn’t appear all bad.

Although the construction industry is still weak, there are signs of a gradual improvement in business conditions, AI Group director of public policy Peter Burn said. ‘‘On the positive side, the house building sector remains close to the point of stabilisation, with lower interest rates starting to provide some support to levels of activity and new orders within the sector,’’ he said.

According to the report, the house building sector is close to stabilising for a second consecutive month. And house builders are reporting increasing confidence among prospective buyers in August, although some businesses continue to point to negative influences of tight credit conditions, slowing mining sector activity and weak investor confidence. The Federal election and an uncertain economic outlook were also perceived to be weighing on business conditions.

Engineering construction continues to decline at a fast pace, as miners cut back on expansion plans and focus instead on improving productivity through existing operations. For construction and engineering contractors like Monadelphous (ASX:MND), United Group (ASX:UGL), Clough (ASX:CLO) and Ausdrill (ASX:ASL), the bad news continues, and there doesn’t appear to be any light at the end of the tunnel yet. The 2014 financial year could mark the start of a dark and deep period – much like the home building industry has been going through.

Foolish takeaway

The RBA is expecting other sectors to drive economic growth as the mining sector winds down, but so far there has been little sign of that happening. More interest rate cuts could be on the cards.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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