Infrastructure construction poised to uphold sector

According to the Australian Construction Industry Forum’s (ACIF) November 2023 forecast, residential construction has declined over the last year and will remain subdued over the next two years while engineering construction experienced a boom in the past year and will continue to grow, especially in the renewable energy space.

A combination of sharply rising interest rates, rising input costs, and the aftermath of the COVID-19 disruption has caused residential construction to drop following a brief surge due to the HomeBuilder stimulus package.  

Approvals for new home builds are declining, but there is still a substantial pipeline of work that will sustain activity in the short-term, with downside risks for 2024-25 if cash rates continue to rise, ACIF said.

“For dwelling investment there is a tension in the outlook between the National Cabinet’s aspirational goal of building 1.2 million homes over the next five years, and the requirements of monetary policy to slow the economy to bring inflation under control,” said ACIF Executive Director, Dr James Cameron.

“The main way the RBA does that is by raising the cash rate which increases mortgage rates, and hence reduces mortgage borrowing and new housing investment.

“In the short term the RBA is winning, but in the medium-term we expect co-ordinated government action in terms of land releases, rezoning, development approvals and concessional finance to lift multi-story apartment construction and increase the density of our capital cities.”

Bankruptcies in the construction industry are now running at an annualised rate of around 3000 a year, roughly twice the pre-Covid level, while profitability in the industry as a whole is still at relatively high levels, ACIF added.

While residential construction is facing a slump, infrastructure construction has surged in the past year with a raft of public transport infrastructure projects, and a surge in approvals and commencements in the renewable energy space.

The ramp up in work yet to be done had been very large over the last year and there is some short-term upside risk to the forecast 6.6 per cent growth for 2022-23.

“Work done in the Engineering construction sector has surged in recent years led by infrastructure construction,” said Deputy Chair of ACIF’s Construction Forecasting Council, Andrew Scott.

“Looking forward, leading indicators continue to point to a robust pipeline in the short-medium term albeit cost pressures are seeing some projects come into question.”

Non-residential building activity has been relatively stable, with strength in Health and Aged Care, Education and Other Commercial (mainly transport and logistics) offsetting weakness in Retail/Wholesale and Accommodation.

It is forecast to be broadly flat in 2022-23 rising by a modest 0.6 per cent.

In heavy industry including mining, weakness in investment in bulk commodities such as coal is being offset by a surge in interest in much less investment intensive critical metals. Investment in clean energy to reduce the industries’ carbon footprint is boosting activity, and investment levels are expected to rise by 5.6 per cent in 2023-24 from a low base.

“To combat climate change there is huge amount of work in prospect in wind and solar in addition to the public work on transmission and storage,” said Director of Outlook Economics and Lead of ACIF Forecasts, Peter Downes.

“Australia may yet become a clean energy super-power and the big question is whether the big projects, like the gargantuan $100 billion Western Green Energy Hub, will stack up and receive final approvals.”