While Brexit will no doubt cast a shadow over the construction industry in 2019, the sector can expect strong but moderate growth of 6% during the year, says Jeanette Mair (pictured), economic and policy research executive with the Construction Industry Federation

Amid international trading tensions, Ireland is now actively preparing a contingency plan for a possible no-deal Brexit. Yet, as we begin 2019 the national economic situation is a healthy one, despite the uncertainty around Brexit.

In fact, the economy is estimated to have grown by 7.5% in 2018. Overall economic growth is expected to moderate to 4.2% of GDP in 2019 (once the UK follows an orderly Brexit based on the withdrawal agreement), followed by 3.6% in 2020, and 2.6% in 2021. Growth would be at least two percentage points lower should there be a no-deal or a WTO Brexit scenario.

Positively, the labour market, tax receipts and trade all increased in size and volume during 2018. Unemployment has fallen from 15% in 2012 to a forecast of 5.3% in 2019. And while this is positive news for the economy in general, the impact of near full employment has led to a tightened labour market and increased competition for skilled personnel in the construction sector, as well as other key sectors of the economy.

Additionally, the latest Tender Price Index published by the Society of Chartered Surveyors Ireland shows that construction tender prices are continuing to rise steadily. The forecast represents a full year increase of 7.4% in tender prices in 2018. Due to the high ongoing demand for construction services, this level of increase is likely to continue in 2019. This emphasises the importance of planning for future construction inflation.

Employment

At the end of Q3 2018, construction provided direct employment for 146,500 people. That figure is 6.4% of total employment. Encouragingly, the increase in overall employment has been broad-based and driven by gains in full-time employment. The largest annual rate of increase was recorded in the construction sector at 13.9%, or an additional 17,900 persons, year on year, to the end of Q 3 2018.

In Association with

The medium-term prospects for construction remain positive following the introduction of the longer-term spatial planning framework (National Planning Framework/Project Ireland 2040) and capital investment plan (National Development Plan 2018-2027). The value of construction output was estimated at over €23.5 billion in 2018.

The year’s growth continued to be driven by the private residential and non-residential sectors. From 2019 onwards, we can expect to see positive gains in contributions from social and productive infrastructure and an increase in the share of repair, maintenance and investment in the private non-residential and residential sectors.

Output

The data available shows that, on an annual basis, the volume of output in building increased by 12% in the third quarter of 2018 compared with the third quarter of 2017. Output volumes increased in civil engineering work (27.3%), non-residential building work (17.9%) and residential building work (7.8%). There was an increase of 19.9% in the value of output in building and construction in the same period.

The overall volume of construction output was forecast to have increased by approximately 11% by the end of 2018. Growth of 6% is forecast in 2019 and 4.2% in 2020. The average annual growth rate in the period 2018-2020 is projected at just over 7%.

By 2020, the volume of construction output is forecast to reach €25 billion (in 2017 prices) or €30 billion in current prices, which is equivalent to around 8.8% of GDP.

In terms of Gross Fixed Capital Formation (investment), underlying domestic demand increased by a strong 20% in the first half of 2018. This was a significant contribution to growth in recent years and is now just below its pre-crisis peak. It was underpinned by strong growth of 11.6% in building and construction. For the non-residential sector, activity was forecast to increase by 10% in both 2018 and 2019, moderating to 8% growth in 2020. Overall, building and construction investment was forecasted to increase by about 12% in both 2018 and 2019 and by 9.4% in 2020.

Total capital expenditure of €10 billion is committed in 2019 (Exchequer and non-Exchequer). This amount is broadly in line with the overall allocation set out in the NDP for 2019 and will be 23.6% greater than it was in 2018.

Education Challenge

Of concern to the CIF, however, is the reduced intake in higher level education due to the recession, which has led to smaller numbers of graduates from construction-related courses entering the labour market, with overall output dropping by 50%. For example, the reduced supply of job-ready civil and building service engineers is expected to affect the sector as the demand for these skills increases further in 2019.

The composition of employment across the construction sector has continued to evolve. We see growth in the share of specialist contracting firms operating within the sector and this reflects the emerging technological, managerial and craft developments that are transforming the way in which the sector is innovating into the future. But this is also leading to a more fragmented industry structure.

Productivity

In 2018, the OECD made a series of recommendations to the government to improve Ireland’s overall productivity. It recommended increasing the use of direct public support for business research and development as a means of targeting the widening productivity gap between foreign multinationals operating in Ireland and Irish firms.

According to recent CSO and OECD data, productivity across the global construction sector is low by comparison to sectors such as ICT, advanced manufacturing and finance.

We understand that lower productivity in construction can partially be explained by the fragmented nature of the sector and lack of vertical and horizontal integration of technology and innovation, as well as the bespoke nature of individual projects and the thin operating margins that have existed for a long time.

However, the construction sector has shifted in recent years from being comparatively less dynamic compared to other sectors of the economy, to one which is showing a greater appetite for innovation, supply chain integration and build-ability.