Construction activity index tumbles for second month in July

But survey indicates construction cost inflation may have already peaked, says BNP Paribas Real Estate

Activity in Ireland’s construction sector fell for a second month in a row in July amid sharply rising costs and a drop-off in demand. However, BNP Paribas Real Estate Ireland said that there are signs that inflation has peaked with the latest rise in prices the softest on record since April 2021.

The commercial property company’s July purchasing managers’ index (PMI) indicates that overall activity across the residential, civil engineering and commercial construction sub-sectors declined precipitously last month.

Having moved into contraction territory in June for the first time since April 2021, the headline activity index — based on a survey of purchasing managers in the sector — fell to 41.8 in July from 46.4, which BNP Paribas said was the most marked month-to-month contraction in activity in a decade excluding periods of Covid-related disruption. Any PMI reading below 50 indicates that activity contracted within a given period.

The decline in activity was most notable in the residential sector, said report author John McCartney, director and head of research at BNP Paribas Real Estate Ireland. Housing activity declined “substantially” in July, Mr McCartney noted, following an only marginal fall in June.

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“In fact,” the report highlighted, “outside Covid-19 lockdown periods, the reduction was the steepest since September 2011.″

Civil engineering activity also continued to decline in July, extending a period of contraction, which has now lasted for five months.

Commercial projects saw the slowest fall in activity but the rate of contraction was still “marked overall” and accelerated from June to July.

New orders decreased across the board for the fourth month in a row with survey respondents noting weaker client demand amid higher prices. Builders also sought to rein spending against a backdrop of sharply rising input prices, reducing their purchasing in July.

On a more positive note, the analysts said that there is some evidence that input price inflation had peaked. While prices remain elevated, the rate of inflation fell to a 15-month low in July.

Input prices were, however, still ticking upwards last month. Some 61 per cent of respondents said their costs had increased in the month, down slightly from 64 per cent in June.

Employment levels within the construction sector also remained relatively stable in July, Mr McCartney said, with 90 per cent of companies saying they retained their staffing levels in July from June. Firms that reduced staffing numbers over the period linked this to lower workloads and cost considerations.

Commenting on the survey results, Mr McCartney said the slowdown reflects several factors.

“Building costs continued to rise in July, laying down a challenge to the viability of marginally profitable projects,” he said. “The pullback may also reflect strong activity in the opening half of the year. Over 130,000 sq m of new office space was added in Dublin during this time, while 13,316 new dwellings were completed — a 49 per cent year-on-year increase. In this context, month-on-month expansion naturally becomes harder to sustain.”

Ian Curran

Ian Curran is a Business reporter with The Irish Times