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Long term data provide context to current outlook for construction activity and costs
Cost inflation is returning to previous norms, while the looming cycle in construction activity has similarities with past cycles
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Looking at longer run historical data sets can provide context to recent market conditions, and can provide a useful comparison between current forecasts and past experience. Both construction activity (excluding resources) and construction costs have increased by around 2.5% per year, on average, since 1990. Activity has actually increased at about this rate over a longer time period, since the 1970's.
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Our current forecasts for construction activity suggest a significant cycle ahead - peaking around 2027 and then declining - but with a long term trend growth rate about the same as the historical average.
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The next construction downturn is forecast for the years 2028 to 2030, inclusive. Looking at construction excluding resources (the red line in the chart above), this next downturn, in percentage terms, should be roughly the same magnitude as the downturns of 2019-2020 and 2014-2015. It is expected to be considerably less severe, however, than the downturns associated with the economic recessions of 1983 and 1991, or the economic slow-down of 2001.
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Looking at construction costs, we mentioned that annual increases have averaged around 2.5% since around 1990. Prior to that was the 'Great Inflation' period of the 1970's and 1980's, which occurred in most developed economies, and resulted from a range of factors including 'oil shocks' and strong government spending in pursuit of full employment objectives.
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Another period of high inflation has occurred over the last few years, due to a rnage of unusual factors which emerged out of the COVID 19 pandemic (interruptions to shipping, shortages of labour and materials, and strong demand as economies rebounded).
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The overall rate of increase in Australian construction costs has now almost returned to the long run average (currently sits for all construction at around 4%). The annual rate of increase is now expected to once again average around 2.5%, per year, between 2023 and 2033, as the issues which caused the unusual increases of the past few years are resolved.
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Note that we do not expect costs to drop back to pre-COVID levels (which would imply negative cost growth for a period of time). Rather we expect a return to normal cost inflation rates, but starting from the current, significantly higher base.
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We should offer a note of caution, however, regarding these forecasts and comments. The rate of growth in activity, and also the rate of cost increase, can vary significantly between geographic regions and particular types of construction work. Please consult with Macromonitor if you have specific cost escalation or construction activity forecasting requirements.
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New Dashboards Available for Subscribers
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The new Dashboards page on our website allows subscribers to create and download custom charts.
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If you would like access these dashboards or if your organisation requires help with construction sector forecasts or project cost escalation forecasts, please get in touch with us, at info@macromonitor.com.au.
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Our most recent reports:
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Australian Construction Cost Trends
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This report examines the outlook for construction costs, in detail be sector and type of input.
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Australian Construction Projects Database
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This latest list of projects corresponds with our fully revised set of forecasts published in November 2023.
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Australian Regional Construction Outlook
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Our latest regional forecasts for residential building and construction have just been released.
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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 outlook for building and construction.
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Australian Road and Bridge Works
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This report examines the strength and composition of the current upturn, and determines the likely timing of the peak, and subsequent decline.
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