In focus Australia

General economic overview

Unemployment is at 3.9 percent in Australia and with such low levels of unemployment, staff shortages are widely reported and temporary business shutdowns common. As Australia is highly reliant on overseas workers, labour shortages have worsened.

Inflation is increasing with higher transport and fuel costs, driving up the prices of common items. Higher housing costs are being driven by record low interest rates and a desire by people to live in better, more spacious accommodation when working from home. The annual inflation rate in Australia climbed to 6.1% in Q2 of 2022 from 5.1% in Q1 and compared with market forecasts of 6.2%.

Higher interest rates will have the effect of dampening growth, especially as the level of mortgage debt has risen.

Construction sector performance

Total construction reduced in 2020 but recovered strongly in 2021 to close to pre-pandemic levels. Australia is seeing higher construction costs driven by higher material prices, labour shortages and extended projects schedules.

The construction sectors in Queensland is operating at full capacity and reduced competition is pushing prices higher. Regional Queensland is especially short of capacity. In Melbourne there is some market capacity and contractor pricing remain more competitive than in other states at present. The various state governments have indicated a willingness to delay project start dates to utilise construction resources more evenly and prevent spikes in costs.

All regions have similar issues with respect to higher materials costs. Prices of steel, electrical cabling, roofing materials, timber, and plastic pipes have all increased, and with lump sum contracts still common the risk to lead contractors is increasing.

Progress of the environmental agenda

In May 2022, Australia elected a new pro-environment government who have committed to reinstate the department of climate change shut down by the previous government. This is likely to lead to the announcement of multiple new environmental initiatives.

Solar projects are progressing rapidly in Australia with approximately 25GW of PV power now installed and providing up to 10 percent of Australia’s energy needs. The sector is progressing quickly with new projects announced regularly.

A major project being assessed is the Sun Cable project which aims to create the world’s largest solar farm and battery storage facility in the Northern Territory with an undersea cable link to export energy to Singapore. This project is currently in the planning and capital-raising stage, with a planned go-live in 2027.

Across Australia, there is a lot of activity in establishing green hydrogen projects. Fortescue Future Industries recently announced the construction of a plant in Queensland to build equipment which produces green hydrogen including electrolysers and wind turbines. This, in conjunction with an AU$3bn investment in a wind solar and battery farm should help kickstart Gladstone in Queensland as a major hydrogen exporter.

Future outlook

Inflation is likely to increase further in Australia and interest rate rises are likely to dampen domestic demand and take some of the heat out of the housing market. Overall, however, economic prospects look solid.

There are numerous long-term infrastructure projects underway and a significant number of private sector projects. Construction projects in defence, health, education, and a resurgence of the commercial sector should keep the construction sector strong.

Over the course of this year, some of the key drivers of inflation should abate as supply chains improve. Steel and other building materials prices should stabilise and return to more normal levels. Tourism and international migration numbers are set to increase again, and this will boost the air travel and hospitality sectors whilst also easing construction skills shortages.