Mining masks weakening construction, sharpening the RBA trade-off
Construction activity grew a strong 3.4% over the March quarter 2026, to be 6.3% higher in year-ended terms.
Construction activity grew a strong 3.4% over the March quarter 2026, to be 6.3% higher in year-ended terms. This was stronger than the gain of 1.0%qtr expected by Westpac Economics and 0.8%qtr expected by the market.
However, the headline figure was inflated by the installation of a floating production unit for the Scarborough Energy Project in WA. Importantly, this investment would have already largely been reflected in National Accounts mining investment outcomes as progress payments were made. Construction work done is recorded on a different value of work done/installed basis and is therefore lumpier than business investment.
Outside of this, construction work done disappointed, falling around 1.0%qtr. The big surprise was the 0.6%qtr fall in residential construction over the quarter, with public infrastructure work also continuing to slide, down 3.2%qtr in Q1 2026 and almost 6.0%yr.
Despite the fall in residential construction, construction cost pressures accelerated over the quarter. This underscores the RBA’s difficult balancing act and the worsening trade-off between inflation and real activity given the global supply shock. Last week’s Westpac-Now final estimate for Q1 2026 suggests that this trade-off will widen further in Q2 2026.
As we anticipated, this was offset by a 2.5%qtr increase in non-residential building, which was most likely driven by construction of data centre structures.
What does this mean for the National Accounts?
Today’s release is the first of a set of partials which will feed into next week’s March quarter 2026 National Accounts. While the headline numbers suggest upside risks for the Q1 GDP outcome, this is not the case. If anything, today’s numbers alone point to weaker growth. Today’s construction work data is recorded on a value of work done/installed basis. This means capital expenditure on machinery, equipment and structures is allocated to the quarter in which the capital items are ready for use. On the other hand, the National Accounts are based on ‘progress payments’, where the value of the investment is recorded incrementally as the project progresses, not just when the project is complete.
What about inflationary pressures?
Cost pressures picked up to be above the pre-pandemic decade average, with residential and non-residential deflators up 3.7% and 4.2% in six-month annualised terms, respectively. This is consistent with the April 2026 CPI data, which shows clearer evidence of pass-through of upstream costs for home building activity, notwithstanding the pull in activity we saw over the quarter. Engineering construction costs are growing at around pre-pandemic rates, consistent with the significant pullback in public infrastructure works.
The detail
The big surprise was the 0.6%qtr fall in residential construction over the quarter, driven by a 1.3%qtr decline in the construction of new dwellings. New dwelling construction was 5.0% higher over the year to Q1 2026, down from 8.7%yr in Q4 2025, indicating that the expansion in residential construction is starting to fade.
On the other hand, renovation activity grew a strong 3.7%qtr, to be a solid 9.4% higher in year-ended terms, returning to levels seen after the pandemic when the HomeBuilder program supported renovation activity.
Engineering construction (EC) grew 6.9%qtr in Q1 2026, to be 4.7% higher in year-ended terms. Looking through the mining-related spike, the dynamic was very different: EC declined 3.5%qtr in Q1 2026, to be 4.6% lower in year-ended terms.
As we foreshadowed in this month’s Market Outlook, the public infrastructure pipeline has passed its peak as the transport mega projects along the east coast of Australia (particularly in Victoria) are finalised. Consistent with this, public infrastructure work continued to slide, down 3.2%qtr in Q1 2026 and almost 6.0%yr.
After adjusting for mining-related volatility, private EC work grew almost 2.0%qtr and 7.3%yr. Private work on electricity generation and distribution (which is dominated by renewable energy projects such as wind and solar) remains elevated, notwithstanding the fall in public activity.
The near-term private engineering construction pipeline looks full of potential, driven by structural industries related to renewables and the data centre roll-out across the country. However, constraints related to the provision of utility services and connecting infrastructure present a risk.
Non-residential building construction grew 2.5%qtr, to be 11.2% higher in year-ended terms. Growth in private activity rose 3.6%qtr, to be 13.8% higher in annual terms, more than offsetting a 0.2%qtr fall in public activity.
While it is unclear which projects are driving the increase, there was a large spike in the commencement of data centres (commercial building n.e.c) in the second half of 2025, which has likely supported activity this quarter and will continue to do so going forward.
State detail
Construction work done was mixed across the states in the March quarter 2026. Western Australia (+30.6%qtr), Tasmania (+5.5%qtr) and Queensland (+2.1%qtr) recorded increases, while all other states and territories saw declines.
New South Wales (-0.7%qtr) and South Australia (-1.0%qtr) recorded modest falls, while Victoria saw a sharper decline (-5.0%qtr). The ACT (-10.3%qtr) and Northern Territory (-13.3%qtr) also contracted over the quarter.
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