Sharp slowdown in commercial activity drags construction index to its lowest reading this year

  • Housing activity also slows, but at a softer rate
  • Input cost inflation picks-up for second successive month
  • New orders down but employment continues to rise and future activity expectations remain positive

Ongoing demand weakness continued to pose challenges to companies within the Irish construction sector and drove sharper downturns in activity and new orders in August. Purchasing activity was subsequently scaled back and the rate of employment growth eased over the course of the month. Cost pressures, meanwhile, mounted further with input price inflation hitting a four-month high.

The headline seasonally adjusted BNP Paribas Real Estate Ireland Construction Total Activity Index registered below the crucial 50.0 mark during August to signal a back-to-back reduction in activity in the Irish construction sector. Posting 44.9, down from 45.6 in July, the latest headline figure was indicative of a marked rate of decline that was the most pronounced in the year so far. The drop in activity was broad-based across all three categories.

The reduction in commercial activity was the sharpest in almost two-and-a-half years while housing activity fell at a solid rate.

According to panel members, activity levels remained constrained by demand weakness. New orders reduced for the second straight month and to the greatest extent since December last year. Panel members typically noted deteriorating demand conditions, linked to interest rate hikes and stubborn inflationary pressures.

Companies were subsequently more cautious with their approach to hiring. While still adding to their workforce numbers in August, the rate of job creation was only marginal overall and the least pronounced in four months. Irish construction firms responded to subdued orders books by scaling back their buying activity for a third consecutive month in August. Albeit easing slightly from the previous survey period, the rate of decline was solid overall.

Despite falling demand for inputs, Irish construction companies signalled a resumption in the deterioration of their suppliers’ performance during August. The rate at which lead times lengthened was strong overall, albeit much weaker than the average for the last three years as a whole.

There were signs of cost pressures regaining some momentum midway through the third quarter of the year.

Having accelerated for the second month in a row, the pace of input price inflation was the most pronounced since April. Just under 31% of respondents saw their input costs rise over the course of the month, against just 4% who noted a reduction.

Irish construction firms continued to express optimism in the year-ahead outlook for activity during August. The main factors underpinning the positive assessment for the future included hopes for an improvement in market demand, the launching of new product lines and the commencement of new projects. That said, the negative trends encapsulated in the latest survey data meant that business sentiment remained historically subdued.

Commenting on the latest survey results, John McCartney, Director & Head of Research at BNP Paribas
Real Estate Ireland, said:

“The August PMI is a blend of emerging and ongoing dynamics. The most notable new trend is a very pronounced decline in commercial building activity in July and August, bucking the trend of consistent expansion over the first half of 2023. This is a welcome development as it limits the potential for oversupply in areas of commercial property, such as offices, where vacancy rates have been rising.

“A second notable is the re-acceleration of input cost inflation in July and August after nearly two years of receding cost pressures. This jars somewhat with the latest CSO data on building materials and labour costs, but could be an early sign that re-emerging energy price increases since June are beginning to impact the sector.

“Despite these new dynamics, key aspects of the PMI narrative remained unchanged. While materials purchases have contracted in response to the pull-back in new orders, Irish building firms appear optimistic about the future; Surveyed firms took-on additional staff for the eighth successive month in August and 88% of panellists expected to be as busy or busier in 12 months’ time.”