Construction activity in Australia’s roads sector is set to grow strongly once again through FY18, according to leading industry analyst and economic forecaster, BIS Oxford Economics. This will be driven by substantial public investment in highways and arterials projects.

However, the company believes this level of growth is unlikely to be sustained beyond FY18 as Federal and State governments turn their focus to rail projects over the coming years, and as rising costs to deliver projects begin to bite into roads funding.

According to the company’s Road Construction in Australia 2018 to 2032 report, after FY18, national levels of road construction should stabilise and remain relatively consistent over the next five years. However, the national numbers hide significant variations in the construction cycle between the states. The recent growth in activity has primarily come from major projects underway in New South Wales and Queensland. As activity in these states begins to drop off from FY19, a growing pipeline of work in Victoria is expected to pick up the slack.

“High levels of Federal Government roads funding, combined with rising State Government investment in substantial infrastructure projects – in some cases turbocharged by asset leases – has driven a 27 per cent real increase in publicly-funded road construction since FY15,” said Adrian Hart, Associate Director of Construction, Maintenance and Mining at BIS Oxford Economics.

“The roads sector has been at the front end of the recovery in public infrastructure investment, particularly in New South Wales. However, the next round of infrastructure projects are more focused on rail. Combined with rising costs and other competing demands on state governments, we expect there to be little room for further increases in real roads construction spending after FY18.”

Although BIS Oxford Economics does not see room for further growth in road construction beyond FY18, it does not expect activity to decline significantly either. Rather, a consistent high level of activity over the next five years is expected to see sustained cost pressures to the industry.

Increased demand for both skilled and unskilled labour will see construction sector wages growth start to pick-up, particularly in the eastern states. Recent oil price rises will affect the industry, as will higher prices for other materials as suppliers work hard to meet demand.

“Road construction prices – as proxied by the ABS Road and Bridge Index – were relatively stable in recent years due to falling oil prices, low wages growth and tight contractor margins,” said Hart. “However, more recent data shows that costs have now started to rise alongside construction activity. While road and bridge construction costs fell in FY16, December quarter ABS data shows that costs are now rising at the fastest pace since the mining boom, and we expect costs growth to accelerate further through FY18.”

The recent growth in roads spending has been underpinned by large projects in the Eastern states, most notably WestConnex, NorthConnex and Pacific Highway upgrades in NSW, and the Gateway Motorway and upgrades to the Bruce and Warrego Highways in Queensland. Looking forward, the Western Distributor and recently-announced North East Link in Victoria will ensure roads construction stays at a high level.

BIS Oxford Economics applies local methodologies and international insights within a fully consistent modelling framework to help clients better understand the markets and sectors in which they operate, by providing reliable and detailed market data, analysis of developments and drivers, and thoroughly researched forecasts.