The construction slowdown is serious for some, but is unlikely to be our undoing, writes John McCartney

FILM PRODUCER, recording artist and all-round savant Baz Luhrmann once observed that life's real troubles never turn out to be the things that we worried about beforehand. Right now Ireland's economists are losing sleep over a sharp slowdown in the construction sector. However, while this will entail some serious pain, it is unlikely to be our undoing.

On the contrary, the adjustment to lower construction output is a necessary evil at this stage in our economic development. Indeed, it is arguable that a bigger danger is actually too much rather than too little construction activity.

Building directly accounts for one-fifth of Ireland's GNP, while 13 per cent of our workers are engaged in the industry. For some time economists have cautioned that this high dependency leaves us vulnerable to a sectoral downturn, and now their warnings are coming home to roost.

Housing completions fell by almost 12 per cent in 2007, leading to negative growth in overall construction output. Employment is also down, and has been falling since the first quarter of 2007.

With expectations that house building will decline by a further 40 per cent this year, and remain rooted at around 45,000 completions in 2009, anxiety about a construction-led economic slowdown is understandable. But before we panic a couple of simple points should be made.

Firstly, the slowdown in residential building is necessary to ensure a stable housing market.

Depending on our assumptions about future migration, it seems clear that Ireland requires between 50,000 and 64,000 new housing units each year.

Our rate of house-building has exceeded this requirement for more than half a decade, and this could not continue indefinitely.

If developers had not curbed supply growth over the last nine months, unsold housing inventories would have ballooned, creating more pernicious economic difficulties for the future. A slowdown in house-building, although a bitter pill to swallow, is just the medicine our economy now needs.

A second important point is that, although it doesn't feel like it, the transition to lower construction output is actually unfolding in a relatively benign way. While residential output is slowing sharply, housing repairs, commercial building and infrastructure - which account for over 45 per cent of building output - are booming. This is clearly visible in the figures.

Overall construction output only fell by 1 per cent last year due to the offsetting increases in other building activity.

On the employment side, it's a similar story with total construction jobs down just 2 per cent. A clear picture is emerging that layoffs in larger building companies are being partially offset by higher self-employment, probably in the repair, maintenance and improvement area of construction.

The big question is whether this uplift in non-residential activity can continue to smooth our transition to lower, long-term levels of house-building. Certainly, until the middle of 2009, the answer seems to be yes. Despite a sharp deterioration in the public finances, Government sources continue to emphasise that infrastructure investment under the National Development Plan will not be sacrificed.

On the home-improvements front, the increased availability of builders will drive housing extensions etc, while building energy ratings from January 1st, 2009, will create a new market for insulation works.

As regards commercial building, all the indicators suggest that activity will remain very strong. Latest CSO figures show that commercial planning permissions continue to rise. Meanwhile, a more immediate measure - the amount of commercial property already under construction - confirms strong pipeline activity.

There are now 421,000 sq m of new office space under construction in Dublin. Of this, around 236,000 sq m will be built-out by Christmas. When we add this to the 110,000 sq m already completed in quarter one, it seems certain that 2008 will set a new record for office-building.

Of the remaining space under construction, the vast majority will be rolled out in the first half of 2009, ensuring that high levels of office-building activity will be sustained for the next 15 months.

Retail building is harder to track. However, we estimate 570,000 sq m of shopping space is currently under construction, meaning that activity in this sector should remain strong until 2009.

Jobs will be lost and economic growth will be affected by the continuing slowdown in housing construction. However, we should consider ourselves fortunate this adjustment has occurred when non-residential activity is strong enough to pick up the slack.

However, we shouldn't push our luck. Commercial building is likely to ease right back in 2009 as our slowing economy digests the large quantities of new space that are being rolled out. Developers will have to become more cautious about the timing and location of their big commercial schemes. If not, by mid-2009 economists could be worrying about too much building rather than too little.

Dr John McCartney is an economist and is head of research at chartered surveyors Lisney