Australian Construction Outlook – Transport Infrastructure

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Australia is in the middle of our biggest ever transport infrastructure boom, featuring:

  • An unprecedented collection of big capital city projects (road and rail),
  • A ramping-up of urban renewal, maintenance and improvement programs (including arterial road upgrades and level crossing removal programs), and
  • A general improvement, on a less splashy scale, of regional works (including Inland Rail and ongoing, large scale upgrades on the Bruce, Pacific, and Princes Highways).

Transport-related construction over the coming year will, however, be impacted by drastic measures currently being adopted by Australia’s Governments, businesses and households, in an attempt to slow the spread of COVID-19. Within this report we highlight a ‘working hypothesis’ regarding the potential magnitude and timing of the negative impact, based on clear assumptions and as much evidence as possible. Our initial estimates include a negative impact, over three quarters (June, September and December 2020). After December 2020, the impact becomes positive due to the re-starting of delayed work, and possible fiscal stimulus measures aimed at the construction sector.

In the long term, we expect transport construction work done to reach an unprecedented peak of over $26 billion (in 2017/18 prices) in 2022/23.

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Australian Regional Construction Outlook

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The metropolitan areas of Sydney and Melbourne plateaued in 2018/19 and we are expecting downturns in both regions over the next couple of years as the residential sector continues to weaken. We expect that both downturns will be softened however by booming commercial building sectors and a number of large urban transport infrastructure projects (road and rail) in each city.

The Brisbane market has started an upturn off the back of strengthening non-residential building and transport infrastructure projects, despite the continuing drop in apartment buildings.

Perth has declined over the past few years, mainly due to a big drop in residential building and a weak economy (related to the mining downturn). Transport projects and small upturns in non-residential building and utilities should slow the decline in 2019/20. Total activity is then expected to be to trend upwards over the forecast period, driven largely by a recovering residential sector.

The resources-dominated Pilbara has seen enormous downturns in activity and big outflows of people but is expected to rebound reasonably strongly from 2019/20.

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Australian Construction Materials Forecasts

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Our latest forecasts assess the implications for construction materials demand of the current downturn in residential building, and the looming downturns in non-residential building and renewables investment.

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Australian Construction Outlook – Residential Building

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The Australian residential building sector has been in a sharp downturn since the latter part of 2018. Dwelling commencements declined in each of the four quarters to September quarter 2019, compared to the corresponding periods a year earlier. Nationally, dwelling commencements were 22% lower over the year to September 2019. The latest approvals data reached a six-year low, indicating that further falls in commencements are expected. Looking ahead, we forecast falling commencements in Australia in 2019/20 and 2020/21, prior to an upturn in 2021/22.

This national picture reflects a variety of cyclical patterns across the states. Residential building in Western Australia peaked in calendar 2014, at the tail-end of the mining boom, and has been declining ever since. Queensland peaked in 2016, then experienced declines, partly related to its own resources sector slump, but had a brief improvement in the first three quarters of 2018. Victoria and New South Wales were at or near their peaks in mid-2018, prior to the start of rapid declines in the latter part of 2018. The greater size of the New South Wales and Victoria markets means that the national picture more closely reflects the cycles in those states.

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Australian Construction Outlook – Overview

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Over the past three years, four main sectors of construction were in expansion – residential building, non-residential building, renewable energy, and road and rail infrastructure. Now, however, three of these sectors are either in decline, or facing imminent downturn. This new report examines the impact of these changes, and what it means for the Australian construction sector as a whole.

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Australian Construction Outlook – Resources

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The overall resources construction sector continued to decline through to year-end 2019, but is poised for an upturn cycle beginning in 2020. Total resources construction has been weighed down by persistent falls in oil & gas investment for the past five years, the decline in this sector will continue until mid-2021. Meanwhile, outside the gas sector, recovery in construction is actually well underway. Total resources construction, excluding oil & gas, increased solidly in FY2019 and should increase again in FY2020. This growth is underpinned by upturns in iron ore and coking coal, which have been accelerated by stronger than expected growth in world steelmaking.

But the upturn has a limited time frame and the outlook is highly variable by commodity type.

For more detail, and to subscribe to this report, please visit the report page.

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Australian Construction Outlook – Non-Residential Building

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Non-residential building activity remains in the midst of a strong upswing. The value of work commenced rose strongly over the period 2015/16 to 2017/18, and the value of work done followed with solid increases over the last two years (2017/18 and 2018/19). There has been a slowing down in project starts in 2018/19, but we believe this is only transient. The most recent six months of approvals data (covering April to September 2019) shows substantial increases in approvals in Quarter 2 and Quarter 3 of 2019, compared with the same quarters of 2018. This is predictive of a rise in the value of project starts, and as shown in our forecasts, we expect a period of strong non-residential building in 2019/20.

Accordingly, most of the upturn is taking place in Sydney and Melbourne. Western Australia and Queensland should experience some delayed, and more modest, growth in work done through 2019/20 and 2020/21.

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Australian Construction Projects Database

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This latest list of projects included in our forecasts corresponds with the fully revised set of forecasts published in November 2019.

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Electricity, Gas and Water: Cost & Activity Forecasts

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In the electricity, gas and water (EGW) sector, the outlook is for subdued cost inflation over the next few years. The inflationary environment in the Australian economy generally is expected to remain weak for a few years, and the EGW sector reflects this. We anticipate relatively weak economic growth in the medium term, resulting in low employment growth and subdued wage increases. A construction downturn is developing, led by residential building, but with non-residential building, renewable energy, telecommunications and, later, public infrastructure, expected to join the general cyclical decline. This will drive a downturn in demand for construction materials and other inputs to construction.

We also anticipate subdued growth in the world economy and global trade volumes, with a number of major risk factors at play, including Brexit, US-China trade tensions, volatility in US politics, Middle East tensions, Hong Kong protests, to name but a few. All of this is likely to dampen commodity prices, at least in the short to medium term. Furthermore, there is reduced scope for further depreciation of the Australian dollar below its current levels, which will also mean lower price increases in Australian dollar terms.

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Australian Construction Cost Trends

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Construction cost inflation was 2.3% in 2018/19, but this is now expected to slow in 2019/20 and stay below 2% in 2020/21 and 2021/22. This slow-down is based on:

  • Slower growth in the Australian economy,
  • A downturn in the non-resources construction sector,
  • Potential declines in commodity prices, and
  • A stabilisation of the Australian dollar, with only a small further depreciation likely.
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