Construction slows again but inflation appears to be easing

Activity in the construction sector softened once more in September, even as there were some signs of optimism for the industry in the latest Purchasing Managers Index (PMI).

Overall, the headline figure in the BNP Paribas Real Estate Ireland Construction Activity Index in September was 48.6 – below the 50 level that marks the difference between contraction and expansion but up from a reading of 44.9 in August.

The construction PMI is a closely watched measure of the health of the sector as it collates various parts of the industry into a single index. Similar indices are used to measure construction in countries across the world, allowing the state of the market here to be directly compared with elsewhere – a crucial tool for investors sizing up the Irish market.

Activity in construction has slowed in eight of the nine months so far this year, with the exception being June.

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Still, the fall was far more modest than in July and August. Inflation in input costs also resumed a downward course after two months that went against the trend while employment in the sector continued its recent pattern of modest but consistent growth.

The figure for activity in the residential sector was 48.9, up from 46.3. Commercial saw a bigger improvement, with the reading jumping from 41.9 in August to 49.2 last month.

BNP Paribas Real Estate director and head of research, Dr John McCartney said September was a broadly positive month for the construction sector.

“Activity edged lower, but the slowdown was marginal, and considerably less than in July and August which were particularly weak months,” he said.

“Input cost inflation slowed again. Panellists reported that the cost of steel, sanitary ware, insulation and construction wages all fell in September. The latter tallies with CSO data which show reduced average earnings in construction and, in tandem with the sustained pickup in employment, suggests that there is no immediate shortage of building workers,” he said.

The survey of companies in the sector said they generally expect to see improving demand over the coming year, leading to higher construction activity. The proportion of firms expecting to be busier in 12 months’ time rose from 31.2 per cent in August to 37.4 per cent in September.

“The return to softening cost inflation, at a time when new homes price inflation is running at 11 per cent, is positive news for viability,” McCartney said. “Perhaps reflecting this, the Future Expectations Index shows that construction firms remain quite optimistic, with 81 per cent expecting to be as busy or busier in one year’s time.”

There are as many as 70,000 potential new homes stuck in the planning process, the Construction Industry Federation estimates. The federation’s director of housing and planning Conor O’Connell told The Irish Times earlier this month that 2024 was likely to be a good year for housing construction, even as the sector deals with higher prices, but warned the planning process would have to be sped up sharply to ease the housing shortage.