Mike Brown/Getty Images Mike Brown/Getty Images

Australia’s construction sector went from bad to worse in late 2018.

Activity levels declined at the fastest pace in over five years. For the residential sector, particularly for apartment construction, activity levels basically collapsed.

Weaker conditions were also seen across commercial and engineering construction.

New orders — a lead indicator on activity levels — also fell at a faster pace. Declines were seen across all parts of the industry.

Analysts say the downturn will ultimately weigh on the broader Australian economy.

Australia’s construction sector went from bad to worse in late 2018.

Activity levels weakened across the board last month while apartment construction basically collapsed.

The Australian Industry Group’s (Ai Group) Performance of Construction Index (PCI) slumped to 42.6 points in December in seasonally adjusted terms, down 1.9 points on the level reported in November.

The PCI measures perceived changes in activity levels across Australia’s construction sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 42.6, it indicates that not only did activity levels weaken again during the month, they did so at the fastest pace in over five years.

As seen in the chart below, that’s a stark turnaround in conditions compared to what was seen throughout most of 2017 and the first half of 2018.

Ai Group

If the headline PCI was enough to make you feel a little uneasy about the outlook for the sector, you better not look at the table below that breaks down the report down into individual components.

It is horrible, especially for the residential construction industry where apartment activity basically collapsed.

Ai Group

Looking at the right-hand side of the table, it shows that activity levels across all parts of the industry weakened during the month, including the engineering sector. That’s one area that was holding up broader activity levels throughout much of last year.

For the first time in 22 months, activity levels were softer than a month earlier.

“This coincided with reports from some respondents of an easing in new tendering opportunities towards the end of 2018,” the Ai Group said.

Like the headline PCI, a figure below 50 indicates a deterioration in activity levels compared to a month earlier. The distance away from 50 indicates how acute the weakening was.

When it came to the residential sector, especially for apartment construction, the news was dire.

“Apartment building was the weakest performing sector, declining for a ninth consecutive month and at the sharpest rate since mid-2012,” the Ai Group said.

“House building also fell further into negative territory with the sector’s rate of contraction the most marked in just over six years.”

So conditions reported across the residential sector were terrible, hinting there’s likely to be more weakness in Australian building approvals in the months ahead, creating potential downside risks for employment and GDP growth given the sheer size of the industry.

Rounding off what was a universally weak performance in December, activity levels across the commercial sector also weakened for a fifth consecutive month, and at a slightly faster pace than in November.

Mirroring the performance by subsector, the activity measures also made for grim viewing.

New orders — a lead indicator on activity levels in the future — fell at an even sharper pace than November with declines seen across all sectors.

“The further decline in new orders is of concern as the industry looks for growth opportunities at the start of 2019,” the Ai Group said.

Margin pressures were also acute as input costs soared while final selling prices slumped sharply.

“The input prices index fell by 1.1 points to 72.0 points, indicating that cost pressures eased slightly during the month but remained significant. The selling prices sub-index decreased by 6.5 points to 40.6 points in December, highlighting the strong competition between builders which is pushing down construction selling prices,” the Ai Group said.

“The ongoing gap between these price series demonstrates that profit margins remain tight for many businesses in the construction industry.”

Respondents said that they’re experiencing significant cost pressures due to elevated energy prices and price hikes related to the strength in commodity prices. They also noted “rising difficulties in filling skilled vacancies as well as sourcing building materials in the volumes required for major projects”.

So the downturn across the sector may not just be about weakening final demand, but other factors such as supply shortages and the ability to find suitable staff.

On that front, firms cut staff for a fifth consecutive month in December, albeit only at moderate levels.

“It points to a general reluctance by businesses to increase their workforce capacity amid the continuation of soft demand at an aggregate level,” the Ai Group said.

With conditions across the sector deteriorating at a faster pace, Peter Burn, Head of Policy at the Ai Group, said the downturn will ultimately weigh on the broader economy.

“With construction accounting for close to 10% of both GDP and employment, the downturn in this sector will weigh on the overall economy,” he said.

Geordan Murray, Acting Principal Economist at Australia’s Housing Industry Association, said that after adding to economic growth in prior years, the residential construction sector will likely detract from economic activity this year.

“The softening in new orders suggests that the completed projects are not likely to be backed up by new projects entering the pipeline,” he said.

“The volume of residential building activity is set to fall in 2019. Residential building won’t be the driver of economic growth that it has been over the last few years.”

Murray said the linkage between tighter lending standards and falling home prices in Australia’s eastern property markets “weighed heavily on residential building during the latter stages of 2018”.

The construction PMI rounds off a weak month of activity indicators in Australia. According to separate reports from the Ai Group, activity levels barely improved in the services industry while those in the manufacturing sector declined.

As an indicator on the Australian economy, the readings paint a pretty downbeat picture of how the economy was performing in late 2018 after a sharp slowdown in the September quarter of last year.

Business Insider Emails & Alerts Site highlights each day to your inbox. Email Address Join

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.