New figures show that there was a sharper decline in activity in the construction sector last month, after the first drop in 14 months in June.

The BNP Paribas Real Estate Ireland Construction Total Activity Index fell to 41.8 in July, from 46.4 in June. Any figure below 50 means that the level of activity dropped.

The decline was the biggest since March 2021, when COVID-19 restrictions affected the sector, but BNP Paribas added that the drop was the biggest in a decade, when periods of pandemic-related disruption were excluded.

New orders drop again

BNP Paribas attributed the sharper fall to stronger inflationary pressures and fewer new orders.

The survey showed that construction firms scaled back purchasing activity and took a more cautious approach to taking on staff.

The housing part of the index slumped to 37.6, while civil engineering recorded 34.6. Activity held up slightly better in the commercial sector, at 44.5.

Overall, new orders decreased for the fourth month running. Firms reported weak demand, with customers put off by inflationary pressures.

Disruption eases

The survey found that, while costs rose sharply again, there were signs that inflation had peaked, as the latest increase in prices was the smallest since April 2021.

Companies also reported a further easing of disruption to supply chains in the construction sector.

As was the case in June, builders kept their staffing levels broadly unchanged in July.

For the second month running, construction firms were pessimistic about the outlook for activity over the coming year, due to worries about the potential for an economic downturn, and the impact of sharply rising costs.

Confidence dropped to the lowest level since the first wave of the COVID-19 pandemic in early 2020.

‘Harder to sustain’

John McCartney (director and head of research at BNP Paribas Real Estate Ireland) said that the July pull-back might also reflect strong activity in the opening half of the year.

“Over 130,000 square metres of new office space was added in Dublin during this time, while 13,316 new dwellings were completed – a 49% year-on-year increase. In this context, month-on-month expansion naturally becomes harder to sustain,” he said.

“Based on projects that are already underway, we expect continued strong residential, office and logistics completions through the remainder of 2022,” he added.

McCartney warned, however, that continued cost inflation meant that new project starts might struggle to keep up with completions, causing a drag on activity in the longer term.