Source: Markit Economics

Business conditions in the Irish construction sector continued to deteriorate in January. Both activity and new business fell sharply, despite the respective rates of contraction easing, while jobs were again cut at a considerable pace. The Ulster Bank Construction Purchasing Managers’ Index (PMI) -- a seasonally adjusted index designed to measure the overall performance of the construction economy -- rose to 36.1 in January, from 33.1 in December, its highest level since last August. However, the reading still represented a substantial fall in activity during the month as wider economic conditions remained fragile. Activity has decreased in each month since June 2007.

Commenting on the survey, Simon Barry, Chief Economist Republic of Ireland at Ulster Bank, noted that: “The January survey of the Ulster Bank Construction PMI indicates that there was some slight easing in the rate of contraction in activity last month. At 36.1, the headline PMI continues to point to pronounced weakness in activity levels but it did rise to its highest level since last August. There was no indication of any improvement in employment dynamics; the jobs index of the survey fell marginally and is still  very much consistent with a sector that is shedding labour.”

“However, some of the forward-looking elements of the survey showed a bit more promise. The new orders index jumped by over 8 points to its highest level in over two years; orders are still declining but some sense here that the pace of deterioration is easing. More encouraging was a 10-point surge in the Future Expectations index which rose to a 31-month high. The January survey picked up a clear improvement in optimism as respondents expressed an expectation that the wider economy will improve over the coming year. There were also indications that Irish construction firms are seeking growth opportunities in markets abroad, with a number of respondents looking to the UK in this regard.”

Civil engineering leads decline in activity: Each of the three monitored sectors posted lower activity during January. The steepest fall was registered in the civil engineering category, where activity decreased for the twenty-sixth successive month. The commercial sector registered the weakest decline in January, although the contraction was still substantial. Meanwhile, activity on residential projects has fallen in each month since November 2006.

Weakest fall in new orders since October 2007: The rate of contraction in new business at Irish constructors eased markedly in January, to its weakest since October 2007. However, the decline in new orders – the thirty-fourth in successive months -- was still substantial as panellists reported a lack of available tenders.

Employment continued to decline sharply: With new work continuing to fall in January, and consequently being insufficient to compensate for the completion of existing projects, Irish construction firms reduced employment again during the month. The latest job cuts were the steepest since May 2009.

Further sharp reduction in input costs: Input costs declined sharply in January, due to weak demand for inputs and intense competition at suppliers. Input prices have now fallen in each of the past seventeen months.

Purchases of raw materials by Irish construction firms declined for the thirty-third month running in January, at a similarly substantial rate to that seen in the previous month. Panellists indicated that purchasing requirements had fallen in line with lower new business levels. Falling workloads at suppliers was the key factor behind the latest improvement in average vendor performance. Lead times shortened greatly overall, albeit at the slowest rate since August 2007.

Strongest optimism in thirty-one months: Optimism regarding future activity levels rose to its strongest in thirty-one months, and was higher than the long-run series average. Positive sentiment reflected an expectation that wider economic conditions will improve over the coming year.