Surging input prices dent confidence in construction sector

Growth in the Irish construction sector slowed further in May as new orders decreased and confidence slumped in the face of “substantial price pressures”.

The latest purchasing managers’ index (PMI) from BNP Paribas Real Estate Ireland fell to 51.5 but remained above the 50 mark which denotes expansion.

The rate of growth in activity has now softened for three successive months. The report noted that “while some companies were able to continue raising activity, others reported that strong cost pressures had hit demand and led to lower workloads”.

The main driver of the slowdown in growth was the commercial category, where activity increased at the softest pace in the current 13-month sequence of expansion. The housing category, in contrast, bucked the wider trend, posting a sharper increase in activity in May.

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The report noted that the rate of input price inflation remained elevated, with close to three-quarters of panellists reporting a rise in their cost burdens over the month.

Among the items most widely reported as having increased in price were copper, fuel and oil. Some firms indicated that the war in Ukraine was behind price rises. The report also indicated that subcontractor rates rose at their sharpest level on record.

Apart from the price impact, the surge in inflation across the sector has triggered a significant drop in confidence. BNP Paribas said sentiment was at its lowest level since October 2020.

Commenting on the latest survey results, John McCartney, director and head of research at BNP Paribas Real Estate Ireland, said: “Conflict in Ukraine and Covid restrictions in China ensured a further rise in materials costs during May. This fed into weaker demand for construction services and a fall in new orders for the second successive month. However the overall picture remains broadly positive,” he said.

“Construction activity continued to expand last month, particularly in the residential sector. Moreover, construction firms remain quite upbeat about the future; the business expectations index stood at 52.7, indicating that more firms expect activity to increase than contract over the next 12 months,” he said.

“In a further sign of confidence, survey respondents hired new staff at the fastest rate since January. Taking the data as a whole, it appears that construction firms have been able to pass a proportion of higher input costs on to the consumer, and are confident that this can continue,” Mr McCartney said.