Data centres and renewables plug the widening public infrastructure gap
Construction activity declined 2.1%qtr in Q2 2026. Outside of mining-related volatility, activity remained solid, driven by residential building (+1.7%qtr), private non-residential building (+2.3%qtr, includes data centres) and electricity related construction (+7.5%qtr in nominal terms).
Construction activity declined 2.1%qtr in Q2 2026 to be 2.7% higher in year-ended terms. This was not far off the 1.0%qtr fall expected by Westpac Economics, but considerably weaker than the +0.4% growth expected by the market consensus. The weakness in the aggregate number was driven by the unwind of a mining related spike (related to the installation of a floating production unit for the Scarborough Energy Project in WA), which in turn was driven by the ABS’ practice in this measure of recognising installed imported structures on a cash basis.
Outside of this, activity was solid, rising an estimated 1.6%qtr on the back of a 1.7%.qtr pickup in residential building and a 2.3%qtr lift in private non-residential building activity. Residential building is up 9.1% in year-ended terms – the strongest outcome in a decade (June quarter 2016). Supporting this residential activity, we saw the number of dwellings under construction lift 10.7% over the year to Q1, with the recent run of approvals suggesting smaller gains going forward. Public infrastructure work declined for a third consecutive quarter, down 2.1%qtr and 3.9%yr, consistent with our view that the infrastructure pipeline has passed its peak.
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 June quarter 2026 National Accounts. While the headline numbers suggest downside risks for the Q2 GDP outcome, this is not the case - if anything, today’s numbers alone point to stronger growth in residential and new buildings activity over the quarter.
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. However, the National Accounts are measured on an accrual basis using ‘progress payments’, meaning the value of the investment is recorded incrementally as the project progresses not just when the project is complete.
What about inflationary pressures and the impact of the data centre boom?
The spike in construction costs during the pandemic was largely synchronised across dwellings, non-residential buildings and engineering construction. Today, however, cost pressures differ as demand profiles across these segments diverge.
While rebounding in the quarter, possibly on the back of the large pick-up in new electricity generation and distribution work, engineering construction costs have been moderating as major public infrastructure programs wind down. In contrast, dwelling construction costs are accelerating as activity in this segment picks up. Non-residential building costs appear to be going sideways, rather than significantly reaccelerating, with strength in private investment, including data centres, offset by a slowdown in public projects.
At 3.9%yr, aggregate construction cost growth is toward the upper end of what was recorded over 2018-19. This raises questions about whether the strong demand in pockets like data centre investment are contributing to broader inflationary pressures. For now, there is limited evidence of this happening. However, construction cost deflators continue to firm in year-ended terms, suggesting that the disinflation anticipated by the RBA may take longer to materialise.
How this plays out going forward depends on how much the roll-off in public construction activity makes room for the pickup in private non-residential building work, particularly data centres, and private engineering construction associated with the renewable energy transition. Data on work yet to be done suggest this handover will keep the pipeline balanced: despite the substantial increase in approved data centre projects, the value of total construction work yet to be done has remained broadly stable as a share of nominal GDP.
The detail
Residential construction outperformed, recording a 1.7%qtr increase in Q2, following an upwardly revised 0.6%qtr rise in Q1 2026 (previously estimated as a 0.6% fall). Growth was driven by a 1.7%qtr increase in new residential construction and a 2.0%qtr lift in renovation activity.
In year-ended terms, residential construction is up 9.1%yr, the strongest growth rate since the June quarter of 2016. This suggests the sector is responding to growing demand by expanding output, despite a prolonged period of elevated interest rates and ongoing cost pressures.
The strength in residential construction suggests supply is finally responding to Australia's housing shortage. However, with approvals easing and demand expected to moderate, the current pace of expansion may prove difficult to sustain, particularly given rising construction costs.
Engineering construction (EC) declined 6.0%qtr in Q2 2026, leaving activity 5.1% lower in year-ended terms. However, this weakness largely reflected the unwind of a mining-related spike. Excluding this volatility, engineering construction grew a healthy 2.0%qtr in the quarter.
As foreshadowed in this month's Market Outlook, the public infrastructure pipeline appears to have passed its peak as major transport projects across Australia's east coast, particularly in NSW and Victoria, are completed. Consistent with this, public engineering work fell a further 2.1%qtr in Q2 and is now almost 4.0% lower than a year ago.
In contrast, private engineering construction remains robust. After adjusting for mining-related volatility, private EC work grew almost 6.0%qtr in Q2. The value of private work on electricity generation and distribution, which is largely driven by renewable energy projects such as wind and solar developments, increased by around 7.5qtr.
Looking ahead, the private engineering construction pipeline remains supported by structural investment themes, particularly the energy transition and the nationwide roll-out of data centres. However, constraints around utility provision, grid connections and supporting infrastructure pose a key risk to the timely delivery of these projects.
Non-residential building construction increased 0.5%qtr in Q2 2026, leaving activity 11.5% higher over the year. Strength in the private sector, up 2.3%qtr and 18.4%yr, more than offset a 3.9%qtr decline in public activity. Private non-residential construction is now running at its strongest level since early 2008, supported by the need to accommodate a larger population and the ongoing data centre build-out.
Although the contribution from individual projects is difficult to quantify, the surge in data centre commencements during the second half of 2025 is likely supporting activity and should remain an important source of construction demand over the second half of this year and beyond.
State detail
State outcomes were heavily influenced by the unwind of the mining-related spike in WA, masking generally resilient conditions elsewhere. Excluding WA, construction activity was resilient, with Victoria leading gains and the eastern states continuing to record gains.
Victoria (+5.8%qtr) recorded the strongest increase, while SA (+1.6%qtr), NSW (+1.4%qtr), Queensland (+1.1%qtr) and the Northern Territory (+2.7%qtr) also posted gains.
In contrast, WA (-19.7%qtr) recorded a sharp decline as mining-related activity unwound following the surge associated with the Scarborough Energy Project in the March quarter. Tasmania (-9.5%qtr) and the ACT (-8.8%qtr) also recorded sizeable contractions.
Despite the quarterly volatility, construction activity remained higher than a year ago in most states, with SA (+11.5%yr) recording the strongest annual growth, followed by Queensland (+7.9%yr), NSW (+7.7%yr), WA (+7.7%yr) and Victoria (+6.7%yr). The exceptions were Tasmania (-4.3%yr), the ACT (-15.7%yr) and the Northern Territory (-81.3%yr), where activity remained well below year-earlier levels.
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Australia and NZ Weekly 24 August 2026
Australia and NZ Weekly 24 August 2026
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