The growth of Australia's construction sector slowed in August, registering 55.3 points on the Ai Group/Housing Industry Association Australian Performance of Construction Index (Australian PCI) down on July's record high reading of 60.5 points.

Source: Australian PCI

Across the four sub-sectors measured in the Australian PCI (houses, apartments, commercial, engineering), engineering construction and house building were the major drivers of growth in August.

August marked the fifth consecutive month of expansion in engineering construction activities, with the sector's sub index rising by 0.5 points to 58.0 points. According to AI Group, the strong performance reflects the boost gained from greater government infrastructure spending, particularly big-ticket transport projects on the eastern seaboard. Consequently, the engineering sector's new orders also exhibited a solid and accelerating rate of growth in August, with the sub-index increasing by 8.1 points to 64.6 points.

Despite this continued strong lift in engineering construction, overall activity was softer. AI Group attributed this to a contraction in apartment building activity and slower growth conditions in house building and commercial construction.

Looking across the industry, although down on July, construction activity (down 4.3 points to 54.0) and new orders (down 7.1 points to 57.5) continued to expand at relatively high rates in August. Meanwhile, sustained growth in aggregate industry demand resulted in a three-year high in expansion of deliveries from suppliers (up 0.5 points to 59.7).

August also marked the fourth consecutive month of growth in construction employment. Furthermore, wages growth also continued last month at a slightly higher rate than in July, with the wages sub-index rising by 0.7 points to 65.3 points. Ai Group noted this was the fastest rate of expansion in construction wages since August 2016, pointing to strong demand for construction workers, as well as the difficulties faced filling various skilled vacancies.

Although the input price sub-index fell by 3.1 points to 70.5 points in August, input inflation remained high. AI Group identified strong cost pressures for construction businesses in the form of rising energy input costs and supplier price hikes related to commodity price increases. Meanwhile, the selling prices sub-index decreased by 1.9 points to 57.2 points with Ai Group suggesting that increased input costs including rising wages are being passed on, but not broadly due to strong market competition.

The Ai Group report notes that "the on-going gap between these price series [inputs costs and selling prices] in the Australian PCI indicates profit margins remain under pressure for businesses in the construction industry. This is consistent with reports from respondents of a highly competitive tendering environment."

Speaking broadly about August's performance, Ai Group head of policy, Dr Peter Burn, said: "While there was some pull-back in the pace of growth, construction sector activity, employment and new orders all lifted again in August. Housing and engineering construction were the major sectoral contributors with activity in apartment building falling and commercial construction treading water after the dizzy heights reached in July.

"The near-term outlook for the overall construction sector remains healthy with new orders stronger other than for the apartment building sub-sector which saw a very steep fall. The very solid pipeline of infrastructure work is providing a major boost to the overall economy and is picking up at least some of the slack left by the retreat of mining-related investment."

To read the full report click here.