Introduction
Our latest report highlights a persistent shortage of skilled labour within the Australian and New Zealand construction industry. The competition for skilled workers has driven up wages, contributing to increased construction costs.
Across the region, higher interest rates and reduced affordability have also resulted in a softening demand in the residential sector. In contrast, sectors such as data centres have demonstrated resilience and continue to be a source of strength for the private sector, albeit unevenly amongst the states and territories.
Public projects continue to drive activity
Australia's economy continues to experience a period of subdued growth, with the second quarter of 2024 marking the third consecutive quarter of 0.2 percent GDP growth. This sluggish performance has led to the annual growth rate falling to its lowest level since Q4 2020.
Australia's construction sector is currently navigating a complex landscape. While the overall market remains stable, there are notable variations across different states and sectors.
Public sector investments continue to be the driving force behind construction activity, and this trend is expected to continue in the near term, with significant projects in transport, renewable energy, housing and social infrastructure dominating the pipeline.
The private sector is experiencing a general softening due to higher interest rates, rising construction costs and slowing market demand. Despite these challenges, the data centre sector remains resilient and continues to be a bright spot for the private sector, with international firms expanding their presence in Australia. As interest rates decline, a gradual increase in private sector investments is anticipated, supporting a stronger outlook for the second half of the decade.
Skilled labour shortages remain a persistent challenge, contributing to rising tender prices. Recent pay deals for construction unions have further exacerbated cost escalation. However, recent developments, including the federal government's decision to place the construction union into administration, may influence future cost trends.
Opportunities for new investment despite cautious outlook
New Zealand's construction sector is also facing challenges, with a slowdown driven by a weakening economy, high migrant departures and subdued market confidence. Government investment uncertainty has further contributed to a softer project pipeline.
New Zealand's economy has also contracted slightly in the second quarter of 2024. However, relief is on the horizon with easing inflation, allowing the Reserve Bank of New Zealand (RBNZ) to cut interest rates. This, coupled with recent government stimulus measures, may help boost growth in 2025.
While the outlook for New Zealand is cautious, easing borrowing costs and potential price improvements in the construction sector could provide opportunities for new investment. Like Australia, data centres continue to be a strong performer for the private sector, with global technology firms exploring opportunities in the region.
However, skilled labour shortages remain a key challenge, particularly for specialised skills associated with high-tech industries. The departure of technically skilled workers is exacerbating this issue, as they are attracted to Australia for more stable and higher-paid opportunities.
