Introduction
Our latest report shows that across the region, the construction sector is experiencing a slowdown, with challenges such as subdued private investment and uncertainties surrounding public sector projects.
Both nations continue to grapple with labour shortages, though the drivers differ. Australia faces high demand for skilled workers due to a robust project pipeline, while New Zealand struggles with declining net migration.
Economic headwinds and high construction costs slow activity
Australia’s economy is experiencing a period of transition. While public spending has provided relief to the economy, it has also contributed to inflationary pressures. Economic growth has slowed, with household and business consumption remaining subdued despite income growth and tax cuts. The labour market remains tight, with unemployment persistently low, and the Reserve Bank of Australia (RBA) is expected to delay rate cuts until later in 2025.
Inflation has eased, but underlying pressures remain elevated, particularly in the services sector. Construction activity has moderated, with private sector investments subdued by economic headwinds and high construction costs, while public sector projects are facing delays due to government reviews and budget constraints. In contrast, the data centre sector continues to boast a robust pipeline of projects, and the corporate occupier sector is experiencing a renewed focus on fit-out upgrades, spurred by tenant demand, Grade A workspaces and a growing emphasis on ESG standards.
Looking ahead, economic growth is expected to remain moderate in 2025, with the commencement of interest rate cuts anticipated in the second half of the year. The construction sector continues to face challenges from high costs and labour shortages, although there have been some improvements in labour availability in cooler markets.
Improved supply chain efficiency and declining material costs
New Zealand's economy contracted sharply in the third quarter of 2024, with Gross Domestic Product (GDP) declining for two consecutive quarters. Inflation has returned to the Reserve Bank of New Zealand's (RBNZ) target range, allowing for interest rate cuts, but economic recovery is being hindered by slower population growth.
This slowdown in demand is attributed to the ongoing effects of restrictive interest rates which has resulted in reduced spending by consumers and businesses. The labour market has softened, with unemployment on the rise. Slower population growth is impacting consumption, housing demand and labour supply.
Construction activity in both the public and private sectors remains subdued. While business sentiment is improving, it has not yet translated into increased private investment. Uncertainty surrounding government project reviews is impacting the public sector pipeline.
Building cost inflation has eased significantly due to improved supply chain efficiencies and declining material costs. However, the construction industry continues to face concerns regarding labour shortages due to declining net migration and an aging workforce.
Economic growth is expected to recover in 2025 as interest rates decline, but employment growth will likely remain weak. It is also likely that inflationary pressures will ease over the medium term.
