While the Australian construction industry struggles with high inflation and interest rates, the Queensland Investment Corporation is optimistic that the economy will recover quickly.
High rates of inflation and interest may be placing a dark cloud on the Australian economy, but Queensland Investment Corporation (QIC) chief economist Matthew Peter took to the stage at the Civil Contractors Queensland 2024 State Conference in May to outline where he sees Australia’s construction industry going in coming years – and it’s not all doom and gloom.
“Core inflation is sitting at four per cent, which is one and a half per cent higher than the Reserve Bank of Australia’s [RBA] target of two and a half per cent,” he says.
“This is a really high level and the RBA has raised interest rates to 4.35 per cent, which is also high.”
However, he says that where the economy is sitting right now is its lowest point – and from here the only way is up.
Moving into the second half of this year, Peter says there are several factors that will contribute to higher consumer spending, meaning economic recovery will happen sooner rather than later.
“This is not going to look like 1991, where we saw a recession,” Peter says.
“The worst of it is now, but the good news is, once we start to see inflation come down and interest rates slow, economic recovery can be relatively quick.”
Announced in the recent federal government Budget, some support will soon be provided, with stage three tax cuts coming in July – which Peter says is worth 1.3 per cent of disposable income. The household sector will also get a $300 rebate on electricity bills, starting from July 1, with Queensland households getting an additional $1,000 off their electricity bills in 2024–25.
“Once some of this additional support kicks in we should start to see a recovery and I expect that we will be back at trend by the second half of 2025,” Peter says.
Turning to construction material costs, Peter says these are starting to ease, due to falling steel and timber prices.
Inflation for steel prices is running at negative 10 per cent on a yearly basis, meaning the price of steel is 10 per cent less now than a year ago.
“The prices of timber have also levelled out to help ease input costs and I expect steel and timber prices won’t go up anymore,” Peter says.
Employment and wages
While there are reasons for optimism in the near future, Peter says it’s important to understand where the economy sits right now and what some of the reasons for it are.
With a current unemployment rate of 4.1 per cent, up from 3.7 per cent at the same time last year, Peter believes that number will continue to creep up.
His reason for this is employers have struggled to get skilled labour into their businesses after COVID-19, so they’ve held on to workers even though growth is slowing in a tight market.
“If you hold on to workers while your demand for products and sales slow – what happens to productivity – it declines,” he says.
On top of that, if employers are told they need to pay higher wages, not only is there a drop in productivity, but there are also increased expenses. Because of the drop in productivity, the cost of labour per unit of output produced is currently running at six per cent nationwide.
“With wage growth running at approximately four to four and a half per cent, it means that the cost per unit of labour is going up more than the wage growth,” Peter says.
This means every worker is producing less than they would produce before and therefore productivity is negative.
Higher unit costs of labour are one of the main reasons why inflation is struggling to get down from four per cent, into the RBA target range of two and a half per cent, Peter says.
“Businesses are now forced to go under, or deal with higher costs of labour in a market seeing less product demand and slower sales,” he says.
With inflation struggling to drop down into the target range, Peter says interest rates will continue to remain high.
“It will continue to be tough for the remainder of the year, but the economy will look much brighter in 2025.”