Economic concerns emerge as the next big challenge for New Zealand’s construction sector

Economic concerns emerge as the next big challenge for New Zealand’s construction sector

The BDO New Zealand Construction Sector Report 2024 reveals construction business leaders are feeling least positive about macroeconomic pressures, including interest rates, inflation, and the cost of living crisis – rather than sector-specific issues which have been prevalent in recent years (such as supply chain and labour shortages).

The sixth annual report, entitled ‘Macroeconomic matters: Construction’s next big challenge’ is based on a nationwide survey of more than 210 New Zealand construction business owners and leaders during March and April 2024 (read more about the survey below). It reveals that just 37% of construction business owners and leaders have felt positive about external economic pressures in the past two weeks. This is the lowest ranking of all 17 business performance metrics surveyed in the report, with leaders feeling considerably more positive about labour supply and supply chains.

“The sector has come off the historic highs of the post-COVID building boom, and now has more stable levels of work. Macroeconomic factors, such as high inflation and interest rates, are significantly impacting the sector and are now the main pressure points for construction businesses. Construction-specific issues are less prevalent than in previous years, with leaders less concerned about the availability of materials and the supply of labour. Construction business leaders will be looking to the upcoming Government Budget to provide further certainty around infrastructure spending and project pipelines.”- Nick Innes-Jones, BDO Construction Sector Leader
Interest rates and inflation put pressure on construction businesses
As New Zealand’s economy hovers around recessionary levels, construction business leaders are feeling the squeeze.

More than two-thirds (67%) of construction business leaders expect inflation to significantly impact their profitability over the coming 12 months, and 49% think high interest rates will affect their profitability.

"Increases in interest rates and inflation have had a big impact on the sector in recent years. While these effects will likely continue to be felt in the near future, inflation increases are no longer as rapid and interest rates may decline over the next 12 months. This should give more confidence for future projects to go ahead.” – Bjorn de Nijs, BDO Advisory Partner
Forward work pipelines create concerns for some
The BDO New Zealand Construction Sector Report 2024 highlights that future workload is top of mind for many construction business leaders. While almost half of leaders have enough confirmed work for over a year, over a quarter only have work confirmed for up to six months. The report suggests this may be due to increased competition within the industry, as well as cuts to Government funding and projects. The residential sector is particularly affected, with 37% of leaders in this area only having sufficient confirmed work for up to six months. Meanwhile, subcontractors have much less work confirmed than head contractors and those in materials/supply chain businesses.

“Looking at the specific areas of the construction sector, we’re finding it’s the smaller companies that are generally having the issues with forward work. A lot of that is due to interest rates and inflation. Smaller companies tend not to have the tail of work that larger companies do, so this means they must remain nimble and agile.” – Nick Innes-Jones, BDO Construction Sector Leader
Some profit margin positivity, but more reductions could be ahead
The report shows many construction leaders are concerned about their finances at present. Although nearly a quarter of construction leaders saw an increase in gross profit margins in the last 12 months, 41% of leaders experienced reduced margins. Margins may fall further as the sector slows and tendering becomes more competitive. Smaller construction businesses (with fewer than 11 staff) are most impacted, with just 16% reporting an increase in gross profit margins in the past year and 52% saying their margins had reduced.

However, construction business leaders feel more confident when looking to the future, with 32% expecting margins to increase in the next 12 months.
Staffing remains a concern, but confidence in filling vacancies is high

The BDO New Zealand Construction Sector Report 2024 reveals that while staffing continues to be a priority, there are positive signs the sector has moved away from the labour crisis seen in previous years.

While 68% of construction leaders will be looking for staff in the coming 12 months, the majority (61%) say they are confident about filling these vacancies. Just 4% are unconfident about their ability to fill vacancies.

“There has been a natural resettling of labour in the market after coming off record-high levels of activity and the market struggling to keep up with demand. So far, we haven’t seen widespread large-scale redundancies, and with only 5% of respondents saying they’re over-staffed, we may avoid this. Some sector leaders are still struggling with skilled labour retention, making now an ideal time to train and upskill staff if possible.” – Martin Veitch, BDO Head of Advisory.

View the report here

About the report

BDO’s sixth edition of the biannual BDO New Zealand Construction Sector Report is based on survey responses from a nationally representative sample of over 210 construction business owners and leaders in March-April 2024. More than 50% of survey respondents worked at businesses with more than 30 employees. More than 50% had an average annual turnover of $10 million+ over the past three years. The survey was conducted by an independent research agency. The report features insights across subsectors and regions, along with practical tips for construction business leaders. It also includes a video interview with BDO Construction Sector Leader, Nick Innes-Jones.