New Zealand’s infrastructure sector is holding firm against a backdrop of broader construction market weakness — but a fuel crisis triggered by escalating geopolitical conflict is pushing civil construction costs sharply higher, and the sector faces a testing period ahead.
That’s the headline finding from RLB’s Second Quarter 2026 Infrastructure Forecast report — Infrastructure Forecast Report 6 — prepared exclusively for RLB by the New Zealand Institute of Economic Research (NZIER).
A fragile recovery derailed by a fuel crisis
New Zealand’s economy had been showing signs of a fragile recovery heading into 2026. GDP grew 0.2% in the December 2025 quarter, following a 0.9% increase in the previous quarter, bringing annual GDP growth to 0.2% for the year ending December 2025. Lower interest rates were finally gaining traction, with spending and confidence picking up in late 2025.
That momentum has since been disrupted. US-Israel air and missile strikes on Iran at the end of February triggered restrictions on ships through the Strait of Hormuz, driving a sharp surge in global fuel prices. The March 2026 NZIER Quarterly Survey of Business Opinion (QSBO) captured the early impact — business confidence fell sharply, with only a net 1% of firms expecting an improvement in the general economic outlook, down from net 39% the previous quarter. By late March, a net 57% of firms were feeling pessimistic.
The building sector has been particularly hard hit, with a net 28% of firms expecting a deterioration in conditions — a sharp reversal from the net 54% who had been feeling positive the previous quarter.
Infrastructure bucking the broader trend
Against this backdrop, infrastructure construction continues to outperform. While residential and non-residential construction remain subdued — weighed down by weak demand and tighter margins — infrastructure is the key stabilising force in New Zealand’s construction sector.
A large proportion of the pipeline has already moved beyond planning into procurement and delivery, pointing to sustained workloads over the medium term.
RLB Director Ed Cook says the sector’s resilience reflects the scale of committed public investment: “RLB sees infrastructure activity continuing to outperform other sectors, supported by a large and increasingly funded national pipeline.”
A $274 billion pipeline — with growing funding certainty
Te Waihanga’s Pipeline snapshot for March 2026 values New Zealand’s infrastructure projects at $274 billion across 5,114 initiatives. The value of fully funded initiatives increased by $5.5 billion over the quarter to $91 billion, representing 41% of the pipeline by number of initiatives.
Of the total pipeline, approximately $163.6 billion is under planning, $12.5 billion is in procurement, and $91.1 billion is either entering or under construction — with increases across all project lifecycle stages compared to the previous quarter.
Transport infrastructure remains the dominant driver at $166 billion, with spending on transport accounting for 50% of total projected spend in 2025 at $10.3 billion. Water infrastructure is the next largest sector at $43.5 billion, representing 19% of projected spend for the year at $3.9 billion. The Australia New Zealand Infrastructure Pipeline records 30 current projects in New Zealand, dominated by twelve transport projects, including eleven in roading.
However, the pipeline’s scale doesn’t guarantee delivery. The Office of the Auditor-General’s draft 2026/27 annual plan identifies infrastructure as a high-risk area for public sector performance, highlighting risks around pipeline stability, cost escalation, consenting processes and delivery capability — as well as major deficits in hospital, water and energy infrastructure. For contractors, consultants and investors, the key question is less whether the work exists and more whether funding, affordability and capacity can align.
Fuel shock pushing construction costs sharply higher
The most immediate challenge is cost. Civil construction costs rose 1.9% in the March 2026 quarter, pushing annual inflation to 3.1% — well above annual residential construction cost inflation of 1.4% and non-residential construction cost inflation of 1.6% over the same period.
Critically, these March quarter figures capture only the early stages of the fuel crisis. Ed notes that the full impact is still to flow through: “We expect the recent surge in fuel prices to drive up construction cost inflation over the coming year, given the sector’s exposure to transport costs.”
Fuel costs feed directly into a wide range of construction inputs — diesel for plant and machinery, bitumen and asphalt production, and freight and materials movement. The NZ Transport Agency cost indexes showed a further lift across most categories in the March quarter, with annual cost growth ranging from 0.1% to 2.8%. Bitumen prices have also been volatile, adding uncertainty for roading projects in particular.
Consensus Economics forecasts expect crude oil prices to ease over the coming year, with the current supply disruptions viewed as short-lived. How quickly that occurs — and how the conflict between the US, Israel and Iran resolves — will be critical to the inflation outlook.
Labour market tightening in specialist roles
The labour market adds another layer of complexity. Despite an unemployment rate of 5.3% in the March quarter — indicating slack remains across the broader economy — building sector firms are finding it increasingly difficult to fill specialised construction roles.
The latest NZIER QSBO shows a net 30% of building sector firms reporting increased difficulty finding skilled workers in the March quarter, even as a net 12% report finding it easier to source unskilled workers. Rising wage pressures and reduced appetite for investment under uncertainty are adding to delivery risk, particularly on large-scale projects requiring specialist civil engineering expertise.
A perfect storm for margins
The combination of rising costs and weak demand is squeezing construction sector profitability. A net 73% of building sector firms reported higher costs in the March quarter, but weak construction demand has limited their ability to pass those costs on — a quarter of building sector firms cut prices in March. The result: a net 68% of building sector firms reported weaker profitability in the March quarter.
Ed notes the difficulty of the current environment: “While civil construction cost inflation rises further on the back of fuel price volatility, spare capacity remains in parts of the broader construction sector, although constraints are emerging in delivery markets.”
Inflation to peak at 5%, then ease
RLB’s CGPI-Civil Index forecasting model — which incorporates crude oil and other key input forecasts — points to a near-term peak followed by a gradual return to more moderate levels.
Annual civil construction cost inflation is forecast to peak at around 5% towards the end of 2026, before easing to approximately 1.6% in late 2027 and recovering to around 2.7% over the longer term.
The elevated near-term inflation reflects the resilience of infrastructure demand as much as it does the cost pressures: “The elevated level of civil construction cost inflation reflects the resilience in the pipeline of infrastructure construction work, in contrast to other types of construction,” Ed notes.
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