The latest Australian Industry Group Australian/Housing Industry Association Performance of Construction Index (PCI) fell 2.4 points to 40.8 in September, well below the 50 point level separating expansion from contraction.
AI Group director public policy Peter Burn said on Thursday that the sector was suffering weak demand, particularly in the house building sub-sector and warned the Reserve Bank of Australia (RBA) not to raise the interest rate.
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"Construction companies continue to be plagued by weak market demand and on-going delays in project starts as private demand struggles to fill the gap left by the drying up of projects funded by fiscal stimulus measures," he said in a statement.
"The weakness across the construction industry in September and the discouraging near-term outlook reflected in low levels of new orders provides further evidence that the decision of the Reserve Bank not to raise interest rates was appropriate.
"Higher interest rates would be a further set back for the industry which is already suffering from a lack of demand and is trimming its labour force accordingly."
The RBA on Tuesday opted to leave the cash rate unchanged at 4.5 per cent for the fifth straight month.
The construction activity sub-index was down to 36.9 in the month, reflecting the reductions in activity across construction, the report said.
The weakest conditions were evident in the house building sector where activity fell by 6.0 points to its lowest level since March 2009.
A drop in new orders across the whole construction industry also contributed to the weaker results.
