Q3 Construction Activity: revisions point to easing capacity constraints
Construction activity surprises to upside, with revisions suggesting capacity constraints are starting to ease. Q3: +1.6%qtr, 3.2%yr.
Construction activity posted a solid increase in the September quarter, moving 1.6% higher following an upwardly revised 1.1% increase in the June quarter (from an initial estimate of 0.1%qtr). This was the strongest quarterly pickup since December 2023. The outcome was stronger than all analysts’ forecasts, with both Westpac and the market generally anticipating flat-to-slight growth in the quarter.
There were significant revisions to data over the prior year. Revisions added roughly 1.2ppts to growth in construction activity over the year to June 2024, lifting the initial estimate of 1.2%yr to 2.4%yr in today’s release. This suggests that some of the capacity constraints faced by the sector have started to ease. Consistent with this, we saw the construction costs reverse course and tick lower for engineering construction (infrastructure) and non-residential dwellings. While residential costs continued to grow in Q3, today’s monthly CPI showed the cost of buying new dwellings moderated in October – so there are positive signs here too. Despite this, growth in building (residential and non-residential) costs remain elevated compared to the pre-pandemic period, suggesting we are not out of the woods yet.
Despite the stronger quarterly result and upward revisions, the key dynamics associated with Australian construction activity remain little-changed.
The composition (discussed in more detail below) continues to emphasise the importance of public infrastructure works as the main driver behind growth in overall construction activity. Both State and Federal Government budgets have boosted the construction project pipeline and have provided a ‘floor’ underneath current and future activity.
Capacity in the sector has been constrained given reported labour shortages, still elevated material costs, a fierce competition for resources and liquidations in the residential space over the past year. Today’s outcomes suggest that capacity constraints faced by the sector have eased for a few quarters now, but remain in place, particularly for residential construction.
On balance, these dynamics have left the level of construction activity broadly steady at an elevated level since Q4 2023, albeit with quarter-to-quarter volatility. Given the still-sizeable pipelines of residential dwelling projects and public infrastructure works, construction activity still has scope to continue operating at its current elevated level for the near-term.
Sector Detail
The 1.6%qtr lift in total construction activity was centred mostly in infrastructure works, up 2.6%qtr. Over the past quarter and the past year, the public sector has been responsible for all the growth in infrastructure activity, up 5.0%qtr (13.1%yr) versus the private sector’s growth of 0.5%qtr (0.1%yr).
The proportion of infrastructure works (by volume) undertaken by the public sector has risen steadily since the impetus from the mining investment boom started to fade around 2013-14. After stabilising at around 40% in the years leading up to an immediately following the onset of COVID-19, the share of public sector infrastructure works has shot up to nearly 50%, a proportion not seen since the early 2000s. This reflects significant boosts in the construction project pipeline across both Commonwealth and State Governments, broad-based across roads and highways, railways, water storage, sewerage and electricity infrastructure.
While infrastructure activity was the main support to overall construction works in the quarter, growth in building construction was positive as well, up 0.7%qtr. The focus here is on the private sector given its much larger share of activity (85-90%). Private building activity rose 0.5%qtr, with a pull-back in non-residential works (–2.5%qtr) more than offsetting a solid increase in residential building (+1.9%). Within the latter, renovation activity represented a small drag (–0.3%qtr), but the expansion in new dwelling construction was the main driver (+2.3%qtr), evident across both new housing (+1.2%qtr) and units/other (+4.2%qtr).
It is encouraging to see private activity cycling through the still-sizeable pipeline of dwelling construction projects, suggesting that some of the pressures bearing down on the sector are starting to ease. However, the sector is not out of the woods just yet – the level of new private dwelling construction has held more-or-less around its pre-pandemic level despite the historic surge in population growth over the past few years.
State Detail
Western Australia, despite a slight pull-back in the latest quarter, remains the clear front-runner in construction activity across the states (+11.8%yr), driven mostly by a rapid pace of infrastructure expansion (+15.9%yr) while building construction remains positive (+3.5%yr).
Both Victoria and Queensland are tracking the same annual pace of 5.0%yr for total construction. Both states share a similar underlying picture across the buildings and infrastructure split, with building activity seen as solid (+3.3%yr Vic, +3.9%yr Qld) and the infrastructure works seen as very robust (+8.4%yr, +6.1%yr Qld).
New South Wales and South Australia are the main drags against the above strength, total activity declining at a pace of –2.4%yr and –4.6%yr respectively. Across both states, weakness is evident across both building and infrastructure work – this burden is shared relatively more evenly across sectors in NSW (–2.9%yr for buildings; –1.8%yr for infrastructure), while it is more uneven in SA (–0.2%yr for buildings; –8.7%yr for infrastructure).
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