16 May 2024

Construction firms feeling the pressure with inflation and interest rates

6:55 am on 16 May 2024
Buildings under construction in Lyall Bay, Wellington

Two-thirds of those surveyed expected inflation to affect profits, and about half expected high interest rates to hit them. (file image) Photo: RNZ / Angus Dreaver

The mood is lifting in the construction sector, but worries about inflation, interest rates, and future work still weigh on firms.

The broader economic outlook has replaced labour shortages and supply chain disruptions as the main concerns, according to the latest Construction Sector Report from advisory firm BDO.

BDO construction sector leader Nick Innes-Jones said big picture issues were to the fore rather than industry specific concerns.

"Macroeconomic factors, such as high inflation and interest rates, are significantly impacting the sector and are now the main pressure points for construction businesses."

Just over a third of respondents said they were positive about the economic pressures, but two-thirds expected inflation to affect profits, and about half expected high interest rates to hit them.

However, there was also an expectation that slowing inflation would lead to lower borrowing costs and help improve confidence.

The construction pipeline

The survey showed about half of those surveyed had at least 12 months of work, but a quarter had only about six months forward of work.

Innes-Jones said with a slow economy and high costs, developers and investors were reluctant to commit to projects, with smaller firms feeling the pinch.

"Smaller companies tend not to have the tail of work that larger companies do, so this means they must remain nimble and agile."

The sector broadly was looking for Budget measures which would offer more certainty about infrastructure spending and projects, such as school rebuilding and repairs, he said.

Nearly a quarter of respondents had increased margins in the past year, but 41 percent had a fall, and the concern was that this might become more widespread.

"Margins may fall further as the sector slows and tendering becomes more competitive. Smaller construction businesses - with fewer than 11 staff - are most impacted."

Activity was slowing but firms were still planning to hire staff and expected to be able to find them readily, given there remained a large pool of migrant workers to be able to tap into, Innes-Jones said.

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