High prices force contraction in construction sector

Severe price pressures forced the Irish construction sector to contract marginally in June, the first time it has reduced in size since April of last year when the pandemic was still restricting activity.

The BNP Paribas Real Estate Ireland Construction Purchasing Managers Index (PMI) found new orders fell at a sharp and accelerated pace.

Purchasing activity was also squeezed and staffing levels stagnated.

“June has been a watershed month for construction activity,” said John McCartney, Director and Head of Research at BNP Paribas Real Estate Ireland.

“The post-Covid rebound has been fading since February, but the June PMI reflects the first absolute pull-back since pandemic restrictions were lifted.

“A recurring theme is that costs are rising faster than the value of delivered properties, squeezing viability,” he said.

The headline seasonally adjusted index dropped below the 50.0 no-change mark in June, posting 46.4 following a reading of 51.5 in May.

The PMI found that viability of projects was put under pressure because costs rose faster than the value of delivered properties.

Around 64% of respondents said that their input prices had increased in June.

While material prices continued to escalate, labour also added to the inflationary pressures.

“The number of people working in construction rose by 30% in the year to March, and the resulting labour scarcity has driven construction wage growth to nearly 9% per annum,” said Mr McCartney.

“However, the June PMI suggests that this is beginning to regulate itself – order books were weaker for the third month in a row and employment growth in the sector has stalled for the first time since we came out of lockdown.”

The contraction in the sector was more pronounced in commercial property construction than in the residential area.

“This reflects cost pressures, but also a recognition that the existing pipeline of Dublin office development looks sufficient to cover near-term net absorption in the market,” said Mr McCartney.

“However the slowdown was marginal and, considering the pipeline of homes that are currently onsite, approximately 28,000 new dwelling completions can be expected this year – a year-on-year rise of well over 30%.”

Pessimism about the outlook of the sector was recorded for the first time since September 2020, with the negative outlook driven by falling new orders and signs of a wider slowdown in the economy.