While Brexit will no doubt cast a shadow on the construction industry in 2019, the sector can expect strong but moderate growth during the year, writes Jeanette Mair, Economic and Policy Research Executive, with the CIF.
At the time of writing we are none the wiser on Brexit and uncertainty regarding its outcome remains high. 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.
At the end Quarter 3, 2018, construction provided direct employment for 146,500 people. That figure represents 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 Quarter 3, 2018.
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 €23.5bn in 2018.
2018’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.
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 €25bn (in 2017 prices) or €30bn 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 forecasted 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 €10bn 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.
Of concern to the CIF, however, is the reduced intake in higher level education due to the recession, which has led to lower 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 impact 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.
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 buildability.
Research, Development and Innovation
The CIF Economic and Policy Research Department has been carrying out some research into productivity during 2018 and early findings are pointing to productivity improvements in construction companies being driven by digital and technology trends, labour requirements (supply chain optimisation), and efficiency gains (capability building, e.g. using advanced analytics). Companies have highlighted the following key factors as important variables in overall productivity improvement:
- More investment in training and education
- More uptake of innovation
- Increased use of BIM, Lean and IT by client and contractor
- Reduction in waste and rework
- More customisable standard designs
- Improved uptake of pre-fabrication
- Better integrated supply chain
- Early contractor involvement
- More use of KPIs to select tenders
- More effective communication/ collaboration between client, designer, builder and regulator
- Greater standardisation of processes across full project lifecycle
- More sustainable procurement.
CIF believes that research-informed and evidenced-based practice should be embedded into the design, construction and operation of the built environment. We have established a construction-related research forum that has the potential to provide a coherent approach to addressing industry skills, educational and research requirements into the future. The environment in which businesses operate in the construction sector is changing fast. Technological and digital innovations are transforming the way in which all of us now live and work.
Research and Innovation
All construction companies can benefit from embracing research, development and innovation (RDI). Some companies are already better placed than others and it is our job to ensure that the supports are in place to enable other companies to be involved in RDI. Best practice knowledge transfer and development of enhanced training and education programme identification will be key in this endeavour.
The CIF will be embedding RDI into the wider policy agenda in construction throughout 2019. This will help strengthen the industry’s response to the changing external environment. We will be focused on strengthening research relationships with the aim of developing a shared construction-related research agenda.
Jeanette Mair, Economic and Policy Research Executive, CIF.