Recovery in construction stalls in July as inflation picks up again

The recovery in construction appeared to stall in July as new orders fell and inflationary pressures picked up again, posing a renewed challenge to the Government’s housing targets.

The latest Purchasing Managers Index (PMI) for construction published by BNP Paribas Real Estate Ireland pointed to a renewed decline in activity in July – it had increased in June – as demand faltered.

The decline was broad-based across the three monitored categories, housing, commercial and civil engineering, it said. The company’s report also highlighted an acceleration in input-cost inflation.

“The acceleration in input-cost inflation also bucked a slowing trend that has been in place since April 2022, and is at odds with the latest wholesale price index data,” said John McCartney, director and head of research at BNP Paribas Real Estate Ireland.

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“It remains to be seen if the more timely PMI is picking up early signs of renewed inflationary pressures or whether this is just a blip,” he said.

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The company’s latest headline index, which measures construction activity, fell to 45.6 in July from 50.4 in June, dropping back below the 50 threshold, which signals a contraction in activity.

Output has now decreased in nine of the past 10 survey periods, and the latest reduction was “the most pronounced” in the year to date, BNP Paribas said. Respondents linked “this to a renewed weakening of customer demand”, it said.

The reading was consistent with the data on new orders, which signalled a first reduction in six months, it said.

Subdued customer confidence and associated delays in the approval of projects were among the factors leading to the fall in new business, the report said. The slowdown poses a risk to the Government’s Housing for All strategy, which aims to deliver an additional 300,000 housing units – or approximately 33,000 a year – out to 2030. The Government’s projected house building target for 2023 is 29,000. And while analysts believe that level is achievable because most of the units are already in the pipeline, what comes after 2023 is at risk from the slowdown in activity.

On the upside, and despite the drop in workloads, construction firms here continued to expand their staffing levels with employment increasing for the seventh consecutive month.

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“The July PMI was a mixed bag,” said Mr McCartney.

“Last year’s construction slowdown gave way to a progressively less severe contraction through the opening half of 2023, culminating in a return to growth in June,” he said.

“In this context, and given the continued pick-up in housing starts, the backslide into contraction in July was unexpected,” he said.

“On a positive note, construction firms reported increased employment for the seventh successive month, and for the 10th time in the last 12 months,” he said.

“This demonstrates that building firms are still able to recruit staff despite the tight labour market, and suggests an underlying confidence about the future. This confidence was replicated in the future expectations indicator which remains positive, and which shows a slight increase in sector optimism between June and July,” Mr McCartney said.